THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

THE EFFECTS OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF SELECTED NIGERIA COMPANIES

ABSTRACT

This study examines the effects of corporate governance on financial performance of selected Nigeria companies. Specifically seek to determine the effect of Board Composition on the financial performance, examine the relationship between board size and the financial performance and ascertain the impact of independence of directors on the financial performance selected Nigerian companies. The adopted descriptive research design to evaluate the effect of corporate governance on financial performance of selected Nigeria companies. The study used regression analysis which is carried out with the use of Statistical Package for Social Science (SPSS) for data analysis. The finding of the study revealed that board composition has no effect on financial performance of selected Nigeria companies and that there is no significant relationship between board size and financial performance of selected Nigeria companies. Finally, the study recommends that much focus should be placed on management efficiency at improving liquidity for the firm and emphasizing on expanding the scope of the business operation by involving in exports of the firms products.

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Corporate governance is a system or an arrangement that comprises of a wide range of practices (accounting standards, rules concerning financial disclosure, executive compensation, size and composition of corporate boards) and institutions (legal, economic and social) that protect the interest of corporation’s owners. Laporta et al (2000) opined that corporate governance is to a certain extent a set of mechanism through which outside investors protect themselves against expropriation by the insiders.

Good corporate governance is widely believed to be an important factor in improving value of a firm in every economy of the world, though the relationship between some corporate governance mechanism and firm financial performance differs in emerging economies like Nigeria and other developed economies of the world (Urhoghide and Omolaye, 2017).

Corporate governance is of significance to the growth, expansion and stability of the economy. It enhances investors’ confidence as well as provides platform for ensuring that duty of loyalty by managers to shareholders exist and that managers will efficiently and effectively strive to maximize the firm’s wealth (Kihumba, 2018). According to the McKinsey and Company Investor Opinion Survey (2000), more than 80% of investors are willing to pay for the shares of well-governed firms than poorly governed firms of comparable financial performance.

In the achievement of the business objectives, corporate governance is a major factor and it is concerned with the relationships that exist among firms’ management, board of directors, shareholders and other stakeholders. Osundina, Olayinka and Chukwuma (2016) emphasized that corporate governance is a non-financial factor that affects the performance of companies and increases accessibility of external finance that brings sustainable economic growth. Weak corporate governance may manifest in form of non-accountability and transparency to stakeholders, bribery scandals, violation of the rights of the minority shareholders, official recklessness among the managers and directors, weak internal control system, insider abuses and fraudulent practices (Olumuyiwa & Babalola, 2012). Also, non – distinction between ownership and control of organization has been identified to be a major reason for weak corporate governance. The corporate governance structures specifies the distributions of rights and  responsibilities among different stakeholders in a corporation, like the board, managers, shareholders and others, and spell out the rules and procedures for making decisions on corporate affairs. This is in conformity with the view of Uche (2004) and Akinsulwe (2006).

The priority of any organization is to effectively, efficiently and ethically manage the company for profitable long term growth and perpetual existence; the policies and practices of management must also align with the interest of shareholders and other stakeholders. Thus, the development of good corporate governance is essential in order to protect corporate stakeholders and maintain factors for control and prevention of collapse and long lasting economic depression (Osundina, Olayinka and Chukwuma, 2016). It is against this background that this study seeks to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.2     Statement of the Problem

Investors are faced with the challenges or problems of making decision in terms of determining when to invest, whether to invest or not. Investors are not interested in the beautification of the firm or its products rather they are very much interested in the financial performance of the firm, because no investor would invest in a non-going concern firm, and the financial performance can be ascertain through the financial information provided by the firm. Corporate governance have enable the separation of owners from management due to the fact that the ownership of most larger companies is widely spread, while the day to day control of the business rest in the hand of a few managers who usually own a relatively small proportion of the total share issued. Many notable scholarly articles written on the topic of coporate governance and have established the relationship between corporate governance and financial porperformance (Abor, 2007). Corporate governance and disclosure practice (Aboagye-Otchere, Bedi and Ossei Kawkye, 2012). Also Kyereboah-Kyeeboah-Coleman and Biekpe, (2006) studied corporate governance and financial performance of an organization. Myers, (1974) argues that there is a significant interaction between corporate financing and investment decisions while the study Abor, (2007) addresses corporate governance and financial performance. from the studies above, few studies exists the effect of corporate governance on financial performance of Nigeria quoted firms. The literary gap, therefore necessitate the need to examine the effect of corporate governance on financial performance of selected Nigeria companies.

1.3     Objective of the Study

The main objective of this research work is to examine the effect of corporate governance on financial performance of selected Nigerian companies. To achieve this; the following specific objectives will be pursued:

1. To determine the effect of Board Composition on the financial performance selected Nigerian companies.
2. Examine the relationship between board size and the financial performance selected Nigerian companies.
3. Ascertain the impact of independence of directors on the financial performance selected Nigerian companies.

1.4     Research Questions

In the attempt to evaluate the impact of corporate governance on financial performance of  selected Nigeria companies, the following research questions were raised.

1. What is the effect of Board Composition on the financial performance of selected Nigerian companies?
2. What is the relationship between board size and financial performance of selected Nigerian companies?
3. What are the impacts of independence of directors on the financial performance of selected Nigerian companies?

1.5     Research Hypotheses

H₀₁: Board Composition has no effect on financial performance of selected Nigerian companies.

H₀₂: There is no significant relationship between board size and financial performance of selected Nigerian companies.

H₀₃: Board independence has no significant effect on the financial performance of selected Nigerian companies.

1.6     Significance of the Study

The finding of this research work will be useful to policy makers such as Nigerian Stock Exchange to encourage compliance to the existing guidelines by establishing if there is a relationship between corporate governance and stock market performance. Given the need to Fast Track governance reforms the significance cannot be over emphasized.

Managers, shareholders and investors can use this research work to construct corporate governance index and use same to forecast stock market liquidity of companies listed in NSE. The study will enable the investors know which stocks are likely to be perform better thus able to help to determine which stocks to acquire and which to dispose. The research work will enable academics and scholars to bridge the gap on the relationship between of corporate governance practices and stock market performance in Nigeria. It will also be useful to future researchers as it will form part of the empirical literature on corporate governance practices.

1.7     Scope of the Study

The scope of the study is limited to 5 listed Manufacturing companies on Nigeria Stock Exchange between 2015 to 2019. These companies include Nestle Nigeria plc, Dangote flour mills Nigeria plc, flour mills of Nigeria plc, Guinness Nigeria plc and Cadbury Nigeria plc.

1.8     Limitation of the Study

Time is the major constraint in this research work. This is due to the fact that this research is carried along with normal academic programme, making it difficult to devote time to it. Additional information need for this study is not within the reach of the researcher, especial annual reports of companies listed on the Nigeria stock exchange.

AN EVALUATION OF IMPACT OF BOARD OF DIRECTOR ON FINANCIAL PERFORMANCE: EVIDENCE FROM NIGERIA FIRM

AN EVALUATION OF IMPACT OF BOARD OF DIRECTOR ON FINANCIAL PERFORMANCE: EVIDENCE FROM NIGERIA FIRM

Abstract

The study evaluated impact of board of director on financial performance: evidence from Nigeria firms. To achieve this objective, the study to examine the impact of board size on the financial performance (Return on Asset) of Nigeria firms and ascertain the impact of board skill on Return on Asset (ROA) of Nigeria firms. This research work was designed using descriptive research design to the relationship between the outside board of directors and financial performance of Nigeria firms. The  regression analysis was used for data presentation and analysis using the Statistical Package for Social Science (SPSS). The finding of the study outside Board Size has no impact on financial performance of Nigeria firms and outside Board Skills has no impact on financial performance of Nigeria firms. Finally the study recommended that much focus should be placed on management efficiency at improving liquidity for the firm and emphasizing on expanding the scope of the business operation by involving in exports of the firms products. The firms operational expenses must be efficiently controlled as it decreases a firm’s liquidity and negatively impact on the company ability to investment – which is a significant determinant of investments. By aiming at optimal utilization of resources through cost decisions, operational expenses can be reduced.

CHAPTER ONE

INTRODUCTION

1.1     Background of the Study

 The importance of the board of directors to corporate developments cannot be overemphasized. The board of directors is one of the prominent corporate governance mechanisms as they are expected to monitor and protect the interests of shareholders. Board process refers to the approach taken by the directors in discharging their duties and the reflection of board’s decision making activities (Macus, 2018).

The board of directors has the power to hire and fire, even the CEO and also to act in various capacities. In theory, the board has enough power to perform its fiduciary duties. How true this can be in practice remains a rhetoric. A lot of scholars have questioned the power of the board and have termed it as mere formal authority (Aghion & Tirole, 2017). Weber (2011) highlights the boards have formal authority to overrule the decisions of executive directors; though the non-executive directors often have insufficient information to effect prompt and prudent corrective actions.

Outside director is an independent director serving on the board of directors and are regarded as a useful device in minizing an agency problem within a firm through monitoring and controlling of executive actions (Bathala & Rao 2015). According to the agency theory, due to the separation between ownership and control of the firms, there is a tendency of managers to pursue their selfish interest at the expense of the shareholders (Jensen & Meckling, 2016). Therefore, having outside board of directors serving on the board would help in monitoring and controlling the unprincipled behavior of management and also to assist in appraising the management more objectively (Abidin, Kamal, & Jusoff, 2014).

Fama (2018) argues that the composition of board structure is an important mechanism because, the presence of outsider board of directors represents a means of monitoring the actions of the executive directors and of ensuring that the executive directors are pursuing policies consistent with shareholders’ interests. Furthermore, boards of directors are one of the centerpieces of corporate governance reform. In effect, the board of directors has emerged as both a target of blame for corporate misdeeds and as the source capable of improving corporate governance (Carter, D‘Souzaa, Simkinsa & Simpsona, 2017). Much of the weight in solving the excess power within corporations has been assigned to the board of directors and, specifically, to the need for outsider board of directors to increase executive accountability.

Firm financial performance is return on asset (profit before interest and tax/Total Asset. The standard measure of the performance of a firm in market-oriented economy is what management could achieve with the total assets at their disposal (Rose and Hudgins, 2008). However, opinions vary on the profitability ratio that should be used as performance measure of management. Rose and Hudgins (2008) argue that the ultimate performance measure is how much net income remains for shareholders. This means that the best measure of performance is profit after interest and tax divided by total assets. Performance failure among Nigerian firms has resulted in loss of public confidence in the banking sector. Performance links an organization’s goal and objectives with organization decisions. Public confidence on the cooperate organizations in Nigeria depends greatly on the profitability of the firms. This explains why there is a critically need to evaluate the impact of outside board of directors on financial performance of an organization.

1.2     Statement of the Problem

Given that all corporations have boards, the question of whether outside board of director play a role cannot be answered econometrically as there is no variation in the explanatory variable as there are limited information on it. The increase reliance on outside directors as an integral element of corporate governance raises a question regarding their incentives. Outside directors rarely receive meaningful performance-oriented remuneration (Black, 2004). So what gives outside directors incentives to work hard, pay attention, and exercise judgment independent of management? One answer, often left implicit, is that legal liability is an important factor in leading outside directors to do a good job. Yet legal liability is problematic as a source of incentives. Fear of litigation may cause directors to shun risks that should be taken. Nervousness about lawsuits can also hamper the recruitment of qualified outside directors and induce some incumbent directors to resign (Korn/Ferry International, 2003). At the same time as outside directors are being touted as a cure for corporate governance problems, one hears an increasingly loud chorus of concern over directors’ liability risk. Consequently, empirical work in this area has focused on structural differences across boards that are presumed to correlate with differences in behavior. For instance, a common presumption is that outside board of directors will behave differently than inside (management) directors. One can then look at the conduct of boards (e.g., decision to dismiss the CEO when financial performance is poor) with different ratios of outside to inside directors to see whether conduct varies in a statistically significant manner across different ratios. When conduct is not directly observable (e.g., advice to the CEO about strategy), one can look at a firm’s performance to see whether board structure matters (e.g., the way accounting profits vary with the ratio of outside to inside directors). It is on this note that this study seek to evaluate the impact of outside board of directors on performance of a firm.

1.3     Objectives of the Study

This study evaluates specifically the impact of outside board of Director on financial performance of Nigeria firms.  To achieve this objective, the study strives to;

1. Examine the impact of board size on the financial performance (Return on Asset) of Nigeria firms.
2. Ascertain the impact of board skill on Return on Asset (ROA) of Nigeria firms.

1.4     Research Questions

1. What are the impacts of outside board of director size on Return on Asset (ROA) of Nigeria firms?
2. What are the impacts of outside board of director skill on Return on Asset (ROA) of Nigeria firms?

1.5     Research Hypothesis 

1. H₀₁: Outside board of director size have no significant impact on Return on Asset (ROA) of Nigeria firms.
2. H₀₂: Outside board of director skill have no significant impact on Return on Asset (ROA) of Nigeria firms.

1.6     Significance of the Study

Board characteristics and firm performance is a relatively new area of study that is currently attracting serious interest among a wide spectrum of people; governments, industry operators, directors, investors, stockholders, academia, international organization, etc. Nigeria represents a good case study for exploring how a outside board of directors constituted under subjective circumstances serve or can fail to serve firm‘s interests; and whether such transmits to the overall well being of shareholders. Specifically, the study is expected to be significant to the key stakeholders in the following ways;

a. Corporate Bodies: Outside Board of Directors or boards of directors generally are the main hub of internal governance mechanism, and their effectiveness may well depend on the board characteristics. Acquiring such evidence will enable firms gain the benefits of a strategic board. Thus, the result of this study will be beneficial to corporate bodies in constituting an effective board that will enhance corporate performance.

b. Policy Makers and Regulators: The result will be appropriate and beneficial to the regulatory authorities in knowing and evaluating the significance of outside board of directors on organizational performance thus giving a better chance to make policies and regulation that will govern corporate governance in an organization.

c. Shareholders: The board is collectively seen as a group of individuals with important responsibilities of leading and directing a firm, with the primary objective of protecting the firm‘s shareholders. The outcome of this study is expected to educate shareholders on the basic outside board of director’s characteristics that impact positively on firm performance. This is important because the shareholders, equipped with this knowledge could insist on the constitution of the board with identified characteristics that enhance board performance through their voting rights.

1.7    Scope of the Study

The scope of this study “An evaluation of the impact of outside board of directors on performance will be limited to quoted companies listed on the Nigeria Stock Exchange (NSE).

CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING FIRMS IN NIGERIA

 CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING FIRMS IN NIGERIA

Abstract

There exists divergence of opinion in literature on the relationship between capital structure and firms financial performance. This mix of opinions makes the direction of the relationship between debt holders and equity holders to be controversial. Therefore, this study investigated the impact of capital structure on financial performance of listed manufacturing firms in Nigeria. The study formulated four hypotheses and used generalized least square multiple regression to analyze the secondary data extracted from the annual reports and accounts of the 31 sampled firms for the period 2009 to 2014. The study found that total debt, long-term debt and short-term debt have significant impact on the financial performance of listed manufacturing firms in Nigeria. The study also found that total debt to total equity has no significant effect on the financial performance of the firms. In view of the findings, it is recommended among others that the management of listed manufacturing firms should work very hard to increase the short term debt to total assets component of their capital structure, since it has positive impact on their financial performance. Also, the firms should reduce the level of total debt to total assets and long term debt to total assets in their capital structure components, because they affect their financial performance negatively.

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The nature and extent of relationship between capital structure and financial performance of firms have attracted attention in the literature of finance. Capital structure involves the decision about the combination of the various sources of funds a firm uses to finance its operations and capital investments. These sources include the use of long-term debt finance called debt financing, as well as preferred stock and common stock also called equity financing. One of the most important goals of financial managers is to maximize shareholders wealth through determination of the best combination of financial resources for a company and maximization of the company’s value by determining where to invest their resources.

Capital structure represents the major claims to a corporation’s asset. This includes the different types of equities and liabilities (Riahi-Belkaoui, 1999). The debt-equity mix can take any of the following forms: 100% equity: 0% debt, 0% equity: 100% debt; and X% equity: Y% debt. From these three alternatives, the first option is that of the unlevered firm, that is, the firm shuns the advantage of leverage (if any). Option two is that of a firm that has no equity capital. This option may not actually be realistic or possible in the real life economic situation, because no provider of funds will invest money in a firm without equity capital. This partially explains the term “trading on equity”, that is, the equity element that is present in the firm’s capital structure that encourages the debt providers to give their scarce resources to the business. The third Option is the most realistic one in that, it combined both a certain percentage of debt and equity in the capital structure and thus, the advantages of leverage (if any) is exploited. This mix of debt and equity has long been a subject of debate in finance literature concerning its determination, evaluation and accounting.

Financial performance is the measure of how well a firm can use its assets from its primary business to generate revenues. Erasmus (2008) noted that financial performance measures like profitability and liquidity among others provide a valuable tool to stake holders which aids in evaluating the past financial performance and current position of a firm. Financial performance evaluation are designed to provide answers to a broad range of important questions, some of which include whether the company has enough cash to meet all its obligations, is it generating sufficient volume of sales to justify recent investment. Capital structure is closely linked with financial performance (Tian and Zeitun, 2007). Financial performance can be measured by variables which involve productivity, profitability, growth or, even, customers‟ satisfaction. These measures are related among each other. Financial measurement is one of the tools which indicate the financial strengths, weaknesses, opportunities and threats. Those measurements are return on investment (ROI), residual income (RI), earning per share (EPS), dividend yield, return on assets (ROA),, growth in sales, return on equity (ROE),e.t.c (Stanford, 2009).

One of the main factors that could influence the firm’s performance is capital structure. Since bankruptcy costs exist, deteriorating returns occur with further use of debt in order to get the benefits of tax deduction and interest. Therefore, there is an appropriate capital structure beyond which increases in bankruptcy costs are higher than the marginal tax-sheltering benefits associated with the additional substitution of debt for equity. Firms are willing to maximise their performance, and minimise their financing cost, by maintaining the appropriate capital structure or the optimal capital structure.

Short term debt to total assets is another item in a firm’s capital structure that affects its financial performance. Short term debts to total assets affect the financial performance of a firm either negatively or positively. Short-term debt to total asset measures the relative short-term debts to total assets of a firm are to meet it financial obligation over the accounting period. Some scholars argue that the shorter the debt the better the firm is in improving its performance.

Understanding the relationship between long term debt to total assets and performance of various sectors of an economy is important to all stakeholders. Long-term debt to total assets measures the relative weight of long-term debt to the capital structure (long-term financing) of the firm in long run. The level of long-term debt of a firm is also believed to be one of the forces expected to influence the performance of a firm. A firm that has a higher long-term debt as proposed by previous studies would have little resources to take care of some other objectives and vice versa (Kurfi, 2013).

As firm financial capital is an uncertain but critical resource for all firms, providers of finance are able to exert control over firms. Debt and equity are the major classes of capital structure, with debt holders and equity holders representing the two types of investors in a firm. Each of them is associated with different levels of control, benefits and risk. While debt holders exert lower control, they earn a fixed rate of return and are protected by contractual obligations with respect to their investment. Equity holders are the real owners of a firm, bearing most of the risk and correspondingly, have greater control over decisions (Aliu, 2010).

The capital structure theory originated from the famous work of Modigliani and Miller (M & M) (1958). They argued that, under certain conditions, the choice between debt and equity does not affect a firm’s value and hence, the capital structure decision is irrelevant; but in a world with tax-deductible interest payment, firm value and capital structure are positively related. M & M (1958) pointed out the direction that capital structure must take by showing under what conditions the capital structure is irrelevant. Titman (2001) lists some fundamental issues that make the M & M proposition hold as: no taxes, no transaction cost, no bankruptcy cost, perfect contracting assumptions and complete and perfect market assumption. The M & M presentation became a subject of considerable debate both in theoretical and empirical research. The work of M & M has been criticized by many scholars in view of the fact that in the real world situation, the main assumptions never hold. They argued that in a non-perfect‟ world, there are factors influencing capital structure decision of a firm.

The fact that manufacturing firms in Nigeria frequently use leverage to finance their operation through debt or equity or both, the extent to which capital structure affects their operation has been an issue of concern. It has been argued that the fastest trend through which a nation can achieve sustainable economic growth and development is neither by the level of its endowed material resources nor that of its vast human resources but technological innovation, enterprise development and industrial capacity. In the modern world, manufacturing sector is regarded as a basis for determining a nation economic efficiency.

Arising from the strategic importance of the manufacturing sector to an economy such as Nigeria’s, it is important for investors and shareholders to understand the effect of capital structure on the performance of manufacturing firms. This is because capital structure decision on how to finance their assets by debt or by equity will affect relationship with the final result for any given period since it influences the returns and risks of shareholders and consequently affects the market value of the shares. In view of this, it becomes imperative to study the relationship between capital structure and financial performance of manufacturing firms in Nigeria.

1.2       Statement of the Problem

There has been an ongoing debate on the issue of capital structure and financial performance of firms. This controversy is further narrowed down to identifying which of the variables debated is most influential in predicting and determining the capital structure of manufacturing firms. The choice of optimal capital structure of a firm is difficult to determine. A firm has to issue various securities in a countless mixture to come across particular combinations that can maximize its overall value which means optimal capital structure. Optimal capital structure also means that with a minimum weighted-average cost of capital, the value of a firm is maximized. According to Rahul (1997), poor capital structure decisions may lead to a possible reduction in the value derived from strategic assets. Hence, the capability of a company in managing its financial policies is important if the firm is to realize gains from its specialized resources. The nature and extent of relationship between capital structure and financial performance of firms have attracted the attention of many researchers. The studies, which are largely foreign based, have however revealed conflicting findings.

In Nigeria, most of the studies did not use other components on capital structure and financial performance. The studies which include Bello and Onyesom (2005), Salawu (2007), Olokoyo (2012), Babalola (2012), Yinusa and Babalola (2012), Sabastian and Rapuluchukwu (2012) and Idode, Adeleke, Ogunlowo and Ashogbon (2014) have left a gap that need to be filled. For example, Salawu (2007), who studied the effect of capital structure on financial performance of selected quoted companies in Nigeria between 1990 and 2004 concentrated on short term debt. His study did not extend to other forms of financing, thus the finding could only be used in the context of short term debt financing. This means even within the purview of debt financing; only the short term aspect of the debt was covered in his study. In reality, a study on capital structure is supposed to cover both types of debt financing.

Babalola (2012) who also studied the effect of optimal capital structure on firm’s performance in Nigeria between 2000 to 2009 using samples of 10 firms, concentrated on total debt to total assets. His study excluded the aspect of total debt to equity, short term debt to total assets and long term debt to total assets financing despite the fact that both types of debt financing are used by the sampled firms. More so, his study and those of Bello and Onyesom (2005) and Olokoyo (2012) used Chi-square technique to analyze their data. Chi-square is considered deficient in terms of reflecting time variant and specific characteristic issues. Studies on capital structure and performance of firms are supposed to use parametric techniques that measure both time variant and specific characteristic issues.  Owing to these identified gaps, a study that will cover the various forms of financing mix in order to address the following questions that remain unanswered is desirable: to what extent do total debt to total assets ratio, total debt to total equity ratio, and the ratios of short-term and long term debt to total assets affect the performance of manufacturing firms in Nigeria? This study attempts to provide answers to this fundamental question.

1.3 Objectives of the Study

The overall objective of this study is to examine the impact of capital structure on the financial performance of listed manufacturing firms in Nigeria. Specifically, the study sought to:

i. evaluate the extent to which total debt to total asset ratio affect financial performance of listed manufacturing firms in Nigeria;

ii. determine the effect of total debt to total equity ratio on financial performance of listed manufacturing firms in Nigeria;

iii. examine the impact of short-term debt to total assets ratio on financial performance of listed manufacturing firms in Nigeria; and

iv. assess the influence of long-term debt to total assets ratio on financial performance of listed manufacturing firms in Nigeria.

1.4       Statement of Hypotheses

To achieve the above mentioned objectives, the following hypotheses were formulated.

H01 Total debt to total assets ratio has no significant impact on financial performance of listed manufacturing firms in Nigeria.

H02 Total debt to total equity ratio has no significant impact on financial performance of listed manufacturing firms in Nigeria.

H03 Short-term debt to total assets ratio has no significant impact on financial performance of listed manufacturing firms in Nigeria.

H04 Long-term debt to total assets ratio has no significant impact on financial performance of listed manufacturing firms in Nigeria.

1.5 Scope of the Study

The study is designed to examine the impact of capital structure and financial performance of listed manufacturing firms in Nigeria. The study covers the period of six (6) years from 2009 to 2014. The study chooses the manufacturing firms as its domain because it covers the larger proportion of industry in Nigeria. The independent variables of the study are capital structure proxied by total debt to total assets, total debt to total equity, short-term debt to total assets and long-term debt to total assets, and the dependent variable is represented by financial performance proxied by return on assets. The period of the study is considered appropriate because it coincides with the period within which major reforms took place in the manufacturing sector.

1.6       Significance of the Study

The outcome of this study would contribute to the existing body of knowledge. Because, though there are a lot of studies on capital structure and financial performance around the globe, there is dearth of evidence using data on manufacturing firms in Nigeria. The outcome of the study would therefore serve as a reference material for subsequent researchers and would provide a basis for further research in this area.

It is the hope that the result of this study will be beneficial to both internal and external parties (i.e managers in maximizing investors return, owners in making an informed decision, creditors in ascertaining credit worthiness of a firm, Government in making favorable financing policies etc) to improve on the GDP contribution by the manufacturing sector and also improve on employment rate once the sector is viable since the stake holders are interested in knowing the impact of such decisions on an organization performance.

Also, the government and its agencies will somehow benefit from this study because the study will highlight the need from its findings if necessary for the government to formulate more favorable financial and economic guidelines as the sector demands and this will sustain the operations of Nigerian Manufacturing firms, especially the potential firms yet to be quoted in the stock market and resultantly contributing to GDP of the nation which have been on the decline hitherto.

The results of this study would also be of benefit to managers, shareholders and creditors of manufacturing firms in Nigeria. Managers would be placed on a sound footing to understand the effect of various financing mix on the operations of their firms.

Shareholders would be able to make an informed decision with regard to their equity interest in relation to the debt financing options available to their firms, while creditors would be able to identify the firms that are financially strong enough to settle their claim as at when due.