Impact of Leverage (Financial and Operating) on Corporate Performance of Selected Quoted Nigerian Manufacturing Firms
- October 8, 2019
- Posted by: RSIS
- Categories: Banking & Finance, IJRISS
International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue IX, September 2019 | ISSN 2454–6186
Abolade Akintola
Department of Banking and Finance, Babcock University, Ilishan-Remo, Ogun-State, Nigeria
Abstract: – The aim of this paper is to study the effect of leverage on the corporate performance of listed manufacturing companies in the Nigerian Stock Exchange (NSE) over a period of seven (7) years (2008-2014 for the selected companies). Leverage explained the use of borrowed money to make an investment and return on that investment. Financial leverage is commonly used in various circumstances as a means of altering the cash flow and financial position of a company. Since the objective of the firm is to increase the wealth of the shareholders, the best leverage policy is the one that increases the shareholders wealth by the greatest amount. It is therefore necessary to understand the nature of the relationship between leverage and value of the firm.
Ex-post facto research design was used for this study. The secondary data were obtained from the financial statements and Fackbooks published by the Nigerian Stock Exchange (NSE). Leverage (financial, operating and combined leverage) as independent variable while price earnings ratio, fixed asset cover and return on capital employed as dependent variable. For testing the hypotheses of this study, linear regression technique has been used. All the hypotheses tested gave positive results. Thus, confirming that leverage has positive and significant effects on price earnings ratio, fixed asset cover and return on capital employed (ROCE). The study recommends that management of quoted firms in Nigeria consistently use debt capital in financing to improve price earnings ratio.
Keywords: Financial leverage, operating leverage, cash flows, shareholders’ wealth, price earnings ratio, return on capital employed.
I. INTRODUCTION
Financing is one of the crucial areas in a firm. Financial manager is concerned with the determination of the best financing mix and combination of debt and equity for his firm. The theory of capital structure is one of the most important financial themes in corporate finance and various studies use capital structure theory to highlight the significance of debt financing. Capital structure of a firm is defined by its leverage, that is a mix of debt and equity employed by a firm in its capital structure.
