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The Impact of Capital Structure and Liquidity on Corporate Returns in Nigeria: Evidence from Manufacturing Firms

Author

Listed:
  • Sebastian Ofumbia Uremadu

    (Michael Okpara University Of Agriculture)

  • Rapuluchukwu Uchenna Efobi

    (Convenant University)

Abstract
The importance of capital structure to corporate financial stability, growth and adequate returns and liquidity cannot be undermined most especially in the midst of recent global financial crises has led to urgent need to embark on this study. The paper used microdata sourced from the financial statements of 10 selected firms covering 2002-2006 to pursue its investigations. The data were arranged in a cross-sectional time series fashion. Specifically, the microdata were analyzed using OLS methodology that included log-linear least squares application to conduct its tests and analyses. We found negative and significant influence of value of long-term debt, ratios of long-term debt to total liability, and ratios of short-term debt to total liability, and ratios of short-term debt to total liability; and equity capital to total liability, on returns; and positive and significant effects of domestic liquidity rate, ratios of long-term debt to equity capital and value of short-term debt, on profitability. Overall, results showed that long-term debt values lead profits under normal OLS function, followed by ratios of long-term debt to equity; short-term debt to total liability, and long-term debt to total liability in descending order of magnitude. Under log-linear function, domestic liquidity leads returns on equity, closely followed by ratios of long-term debt to total liability, and long-term debt values ranked third. It is therefore recommended that corporate firms in Nigeria (including other African countries) should strive to always maintain a balanced proportion of long-term debts in their capital structure mix; and that both the financial system (including economic system) and the corporate enterprises should always endeavor to uphold a policy of maintaining an adequate domestic liquidity rating for there to be sustained increases in corporate growth and profitability in the years ahead.

Suggested Citation

  • Sebastian Ofumbia Uremadu & Rapuluchukwu Uchenna Efobi, 2012. "The Impact of Capital Structure and Liquidity on Corporate Returns in Nigeria: Evidence from Manufacturing Firms," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 2(3), pages 1-16, July.
    • Handle: RePEc:hur:ijaraf:v:2:y:2012:i:3:p:1-16
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    References listed on IDEAS

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    Cited by:

    1. Osaretin Kayode Omoregie & Sodik Adejonwo Olofin & Fredrick Ikpesu, 2019. "Capital Structure and the Profitability-Liquidity Trade-off," International Journal of Economics and Financial Issues, Econjournals, vol. 9(3), pages 105-115.
    2. Babatunde Yusuf & Akinwunmi Onafalujo & Khadijah Idowu & Yusuf Soyebo, 2014. "Capital Structure and Profitability of Quoted Firms: The Nigerian Perspective (2000-2011)," Proceedings of International Academic Conferences 0202135, International Institute of Social and Economic Sciences.
    3. Dr. Samuel Adebayo OLAOYE & Dr. Abolade Francis AKINTOLA & Adeyemi Samson OGUNDIPE, 2019. "Effect of Working Capital Management on Profitability: A Case of Listed Manufacturing Firms in Nigeria," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 3(11), pages 230-238, November.
    4. Sunday Nosa UGBOGBO (Ph.D) & Sunday Nosa UGBOGBO (Ph.D), 2023. "Capital Structure and Corporate Financial Distress of Quoted Non-Financial Firms in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(6), pages 1302-1314, June.
    5. Halkawt Ismail Mohammed Amin & Kemal Cek, 2023. "The Effect of Golden Ratio-Based Capital Structure on Firm’s Financial Performance," Sustainability, MDPI, vol. 15(9), pages 1-25, April.
    6. Sebastain Ofumba Uremadu & Onuegbu Onyekachi, 2018. "The Impact of Capital Structure on Corporate Performance in Nigeria: A Quantitative Study of Consumer Goods Sector," Current Investigations in Agriculture and Current Research, Lupine Publishers, LLC, vol. 5(4), pages 697-705, November.
    7. repec:bcp:journl:v:3:y:2019:i:11:p:230-238 is not listed on IDEAS
    8. Hwerien Rosemary Idamoyibo, 2024. "Financial Structure and Corporate Profitability of Firms in Nigeria: Does Firm Age Act as a Moderator?," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(7), pages 2259-2271, July.
    9. Gbalam Peter Eze & Ekokeme, Tamaroukro Timipere, 2020. "Effect of Financial Structure and Macroeconomic Fundamentals on Firm Profitability," International Journal of Research and Scientific Innovation, International Journal of Research and Scientific Innovation (IJRSI), vol. 7(2), pages 114-122, February.
    10. Benter Omollo Achieng & Willy Muturi & Joshua Wanjare, 2018. "Effect of Equity Financing Options on Financial Performance of Non-Financial Firms Listed at the Nairobi Securities Exchange, Kenya," Applied Economics and Finance, Redfame publishing, vol. 5(4), pages 160-173, July.

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    More about this item

    Keywords

    Capital structure; liquidity; long-term debt; short-term debt; profitability; corporate returns; Interest rates; inflation rate; reserves;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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