Capital Structure and Financial Performance of Quoted Manufacturing Companies in Nigeria

Abstract

Abstract: This study examines capital structure and financial performance of quoted manufacturing companies in Nigeria, with a view to identifying the optimal mix of financing that enhances company profitability and market valuation. Employing an ex-post facto research design, the study analyzes secondary data from 38 manufacturing companies listed on the Nigerian Exchange Group (NGX) over the period 2012 to 2023. The investigation utilizes a panel Autoregressive Distributed Lag (ARDL) model—including error correction and bounds testing—to differentiate between short-run and long-run effects short-term debt, and long-term debt on key performance indicators such as Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q. The empirical findings reveal that long-term debt financing, exhibits a positive influence on both ROA and Tobin’s Q in the long run, indicating its role in financing growth and operational improvements through tax advantages and disciplined managerial oversight. Short-term debt, on the other hand, negatively affects financial performance in the short term due to liquidity risks and the burden of frequent repayments. Nevertheless, short term debt when used judiciously, can provide several notable advantages that complement the broader capital structure of a manufacturing company. One of the primary benefits of short-term debt is its inherent flexibility.