Debt Capacity and Financial Performance of Quoted Firms in Nigeria
DOI:
https://doi.org/10.47672/ajf.801Keywords:
Capital structure, Debt capacity, Financial Performance, Pecking order theory, Trade off theory.Abstract
Introduction: The field of research treating debt capacity can be comprehended as a unique piece of a lot more extensive capital structure hypothesis. This started with the paper of Modigliani/Miller in 1958. There has been a continuous and serious hypothetical dialog about the ideal capital structure of an organization. One generally new piece of the related discussion is debt capacity and potential connection to the capital structure of an organization.
Purpose: The purpose of the study was to examine the effect of debt capacity and financial performance of quoted firms in Nigeria. This study expected that debt capacity can be a way to characterize and deal with the capital structure of an organization.
Methodology: The study formulated 3 hypotheses and the least square multiple regression was used for hypothesis testing empirical results based on 2014 to 2018 accounting and marketing data for 20 quoted firms in Nigeria lend some support to the pecking order and static tradeoff theories of optimal capital structure. Data were sourced from the Nigeria Stock Exchange, Security and Exchange Commission, and other relevant data sources. This study investigated, experimentally, if there might be a significant relationship between the debt capacity of organizations and their financial and market performance.
Findings: A firm’s debt capacity was found to have a significant impact on the firm’s accounting performance measure. Debt capacity measures have a positive and significant relationship with the market performance measure (Tobin’s Q). A fascinating finding is that all the influence estimates have a positive and exceptionally critical association with the market execution measure (Tobin’s Q), which could somewhat bolster Myers, (1977)’s contention that organizations with high transient obligation to add up to resources have a high development rate and superior.
Unique contribution to theory, practice and policy: The consequences of this result further affirm some earlier discoveries by different researchers and prior analysts and the exploration work has had the option to discover answers to the examination addresses prior brought up in the basic part in the accompanying ways. It was therefore recommended that Companies can finance themselves with debt and equity capital. By increasing the amount of debt capital relative to its equity capital, a company can increase its return on equity. Also, in transition, the economic environment is more volatile and riskier than in developed markets. Therefore, a management scheme of capital structure that provides for flexibility in financing is preferable.
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