The Impact of Capital Structure on Firm Performance: Evidence from

the Nigerian Financial Services Industry from 2011 to 2017.

Introduction

Capital structure is the most significant discipline of company’s operations.

Capital structure decision is a vital decision with great implication for the firm’s
sustainability. The ability of the organization to carry out their stake holders need
is closely related to the capital structure (Uremadu & Onyebuchi, 2018).

Nigerian financial sector had experienced myriad of reforms in the last two
decades owing to the general state of the sector which calls for exigent
institutional restructuring. In the past decades the observed trend of performance
of commercial banks in Nigeria has not been encouraging as can be seen from
series of abnormalities and signs of stagnation in the banking sector in the 1990s
which as a result the Apex bank (Central bank of Nigeria) had to revoke licenses of
31 banks between 1994 and 1998 for reasons including inadequate capitalization,
insider dealings and debt overhang (Sev et al., 2014 cited in Nwude and
Anyalechi, 2018).
Capital structure refers to several alternatives that could be adopted by a firm to get
the necessary funds for its investing activities in a way that is consistent with its
priorities. Most of the effort of the financial decision making process is centered on
the determination of the optimal capital structure; where the cost of capital is
minimized and firms’ value is maximized (Gebremichael, 2016). The relationship
between capital structure and profitability is very important as this affects the value
of the firm. The mix of debt and equity has an impact on the share price. To this
end there is a need to investigate the impact of business cycles on this relationship
between capital structure and profitability, more so in the aftermath of the global
recession that the world is yet to fully recover from (Marandu & Sibidi, 2016).

Many theories that explore the concept of capital structure exist. The most popular
approaches of the capital structure is Modigliani and Miller (Hafeez, M.M. et al,
2018). The literature on capital structure has been expanded by many theoretical
and empirical contributions. For non-financial firms the empirical literature has
generally focused on particular variables that have been found to be consistently
correlated with leverage such as: age, size, growth, profitability, market-to-book
ratio, collateral value and dividend policy. On the other hand, the capital structure
of banks is still a relatively under-explored area in the banking literature
(Gebremichael, 2016). Therefore, concerted efforts have been made by researchers
to unravel factors driving profitability at both firm and industry level using novel
and sophisticated theoretical models (Al-Jafari and Al-Samman, 2015; Pratheepan,
2014 cited in Odusanya, I. A. et al, 2018).

While there are several works done to unravel the impact of capital structure on
firm performance in Nigeria, other sub-Saharan African countries and Asia, none
of the studies have focused primarily on the impact of capital structure on the
profitability of firms in the financial services industry in general in Nigeria. Most
of the works had focused on commercial banks profitability and capital structure
(Nwude & Anyalechi, 2018; Gebremicheal, 2016; Marandu & Sibindi, 2016;
Mehar, R.M, 2018; Al Arif & Awwaliyah, 2019; Hafeez, M.M. et al, 2018;
Subramaniam, A. 2018, Dai, T.B., 2017). Other researchers have focused on the
study of the relationship between capital structure and profitability on the
consumer goods sector in Nigeria specifically and globally (Odusanya, I.A. et al,
2016; Uremadu & Onyekachi, 2018; Abeywardhana, D.K.Y., 2015; Chong, C.C. et
al, 2019; Sobevtov, Y. 2013). Consequently, the main aim of my proposed
research is to unravel the impact of capital structure on the financial performance
of firms in the financial services industry in Nigeria. This aim will enable analysts
to broaden their view of the impact of capital structure of financial services
companies in Nigeria on their financial performance other than focusing narrowly
on this phenomenon as it affects commercial banks only. This is very important
because commercial banks are not the only players in the financial services sector
in Nigeria. Other players abound such as insurance companies, investment
management companies, trustees, pension fund managers, micro-finance banks,
financial technology companies, leasing companies and those rendering ancillary
services that are regulated by the Central Bank of Nigeria.