The Effect Of Capital Structure On Corporate Performances (A Case Study Of Selected Companies In Onitsha

The Effect Of Capital Structure On Corporate Performances (A Case Study Of Selected Companies In Onitsha

Chapter One

Preface

Background to the study

Backing is one of the pivotal areas in a establishment, a backing director is concerned with the determination of the stylish backing blend and combination of debts and equity for his establishment. Capital structure decision is the blend of debt and equity that a company uses to finance its business( Damodaran, 2001).

One of the significance of capital structure is that it’s tightly related to the capability of enterprises to fulfill the requirements of colorful stakeholders. Capital structure represents the major claims to a pot ‟ s means which includes the different types of both equities and arrears( Riahi- Belkaonui, 1999). There are colorful druthers of debt- equity rate, these includes; 100 equity 0 debt, 0 equity 100 debt and X equity Y debt( Dare and Sola 2010). From these three druthers , option one is that of the unlevered establishment, that is, the establishment that shuns the advantage of influence( if any). Option two is that of a establishment that has no equity capital. This option may not actually be realistic or possible in the real life profitable situation, because no provider of finances will invest his plutocrat in a establishment without equity capital. This incompletely explains the term “ trading on equity ”, that is, it’s the equity element that’s present in the establishment ‟ s capital structure that encourages the debt providers to give their scarce coffers to the business. Option three is the most realistic bone in that, it combines both a certain chance of debt and equity in the capital structure and therefore, the advantages of influence( if any) is exploited. This blend of debt and equity has long been the subject of debate concerning its determination, evaluation and account.

After the Modigliani- Miller( 1958 and 1963) paradigms on enterprises ‟ capital structure and their request values, there have been considerable debates, both in theoretical and empirical inquiries on the nature of relationship that exists between a establishment ‟ s choice of capital structure and its request value. Debates have centered on whether there’s an optimal capital structure for an individual establishment or whether the proportion of debt operation is applicable to the individual establishment’s value( Baxter, 1967). Although, there have been substantial exploration sweats devoted by different scholars in determining what seems to be an optimal capital structure for enterprises, yet there’s no widely accepted proposition throughout the literature explaining the debt- equity choice of enterprises. But in the last decades, several propositions have surfaced explaining enterprises ‟ capital structure and the attendant goods on their request values. These propositions include the pecking order proposition by Donaldson,( 1961), the capital structure applicability proposition by Modigliani and Miller( 1963), the agency costs proposition and the trade- off proposition( Bokpin and Isshaq, 2008).

fiscal constraints have been a major factor affecting commercial enterprises ‟ performance in developing countries especially Nigeria. The base for the determination of optimal capital structure of commercial sectors in Nigeria is the widening and deepening of colorful fiscal requests. substantially, the commercial sector is characterized by a large number of enterprises operating in a largely deregulated and decreasingly competitive terrain. Since 1987, fiscal liberalization has changed the operating terrain of enterprises, by giving further inflexibility to the Nigerian fiscal directors in choosing their enterprises ‟ capital structure. Alfred( 2007) suggested that a establishment ‟ s capital structure implies the proportion of debt and equity in the total capital structure of the establishment. Pandey( 1999) discerned between capital structure and fiscal structure by affirming that the colorful means used to raise finances represent the establishment ‟ s fiscal structure, while the capital structure represents the commensurate relationship between long- term debt and equity capital. thus, a establishment ‟ s capital structure simply refers to the combination of long- term debt and euity backing. still, whether or not an optimal capital structure exists in relation to firm value, is one of the most important and complex issues in commercial finance.

The commercial sector in the country is characterized by a large number of enterprises operating in a largely deregulated and decreasingly competitive terrain. Since 1987, fiscal liberalization performing from the Structural Adjustment Program changed the operating terrain of enterprises. The macroeconomic terrain has not been conducive for business while both financial and financial programs of government haven’t been stable. Following the Structural Adjustment Program, advancing rate rose to a high side from1.5 percent in 1980 to a peak of29.8 percent in 1992; but it declined to16.9 percent in 2006. The high interest rate

implies that costs of borrowing went up in systematized fiscal request, therefore increased the cost of operations. The Structural Adjustment Program( SAP) came with its conditions, programs that liberalized and opened up the Nigerian frugality to the outside world indeed when the nation ‟ s domestic yield can not stand in equal comparison to transnational goods, causing inimical balance of payment as domestic demand for foreign goods increased also led to the high volatility of the exchange rate system thereby rendering business in Nigeria uncompetitive, especially given high cost of borrowing and massive deprecation of Naira, which crowned to adding rate of Affectation in Nigeria.

Statement Of Problem

The study of capital structure has traditionally been carried out by finance experimenters and at stylish there has been mixed results. The factual impact of capital structure on commercial performance in Nigeria has been a major problem among experimenters that has not been resolved. Heretofore, there has been different methodology, variables, theoretical frame and there’s still no concrete conclusive empirical substantiation in the literature about how capital structure influences commercial performance of enterprises ‟ in Nigeria.

According to Chandrasekharan( 2012), enterprises ‟ size, growth and age are significant with the structure of debt and equity of the establishment, whereas, profitability and tangibility are not.

Indeed our own country exploration workshop similar as; Babalola( 2014), revealed that according to the dominant commercial finance paradigm, capital structure choice is a trade- off between the costs and benefits of debt, and it has been refuted that large enterprises are more inclined to retain advanced performance than middle enterprises under the same position debt rate. In another study, concluded that the manufacturing assiduity ‟ s capital structure in Nigeria is harmonious with trade- off proposition and the thesis tested that the commercial performance is a nonlinear function of the capital structure. Ishaya and Abduljeleel( 2014), also reveals that debt rate is negatively affiliated with profitability whereas equity is directly related with profitability. Akinyomi( 2013), revealed that each of debt to capital, debt to common equity, short term debt to total debt and the age of the enterprises ‟ is significantly and appreciatively related to return on asset and return on equity but long term debt to capital is significantly and fairly affiliated to return on asset and return on return on equity. His thesis also tested that there’s significant relationship between capital structure and fiscal performance using both return on asset and return on equity. Shehu( 2011), profitability variable supports the pecking order proposition, the tangibility variable supports the trade- off proposition, the growth proposition supports the agency proposition while the size variable supports the asymmetry of information proposition.

Following the work of Appah et al( 2013), revealed that short term debt, long term debt and total debt have significant negative relationship with performance using return on asset and return on equity, non duty debt and liquidity also shows negative relationship with performance while tangibility and effectiveness has a significant positive relationship with performance. Taiwo( 2012), in his findings revealed that the tried enterprises weren’t suitable to use the fixed asset composition of their total means judiciously to impact appreciatively on their enterprises ‟ performance. Owolabi and Inyang( 2012), bandied the factors that constitutes the determinants of capital structure in Nigeria and that enterprises with a huge portion of capital structure composed of external debt finds it delicate to pay back when due because of some factors similar as fiscal torture, ruin trouble etc. Ogebe et al( 2011), supported the traditional proposition of capital structure which asserts that influence is a significant determinant of enterprises performance and that there’s a significant negative relationship is established between influence and performance.

Bassey et al( 2013), revealed that only growth and educational position of enterprises possessors were significant determinants of both long and short term debt rates, means structure, abe of the enterprises, gender of possessors and import status impacted significantly on long term debt rates, while business threat, size and profitability of enterprises were major determinants of short term debt rate for the enterprises under disquisition. Simon- Oke and Afolabi( 2011), revealed in their study a positive relationship between enterprises ‟ performance and equity backing as well as between enterprises ‟ performance and debt- equity rate. There’s also a negative relationship that exists between enterprises performance and debt backing due to high cost of borrowing in the country. Semiu and Collins( 2011), in their study suggested that a appreciatively significant relationship exists between a establishment ‟ s choice of capital structure and its request value in Nigeria.

In light of all this differences in the findings of the below exploration work constitute huge problems which this exploration work will attack so as to achieve the ideal of determining the impact of capital structure on firm ‟ s performance in Nigeria.

Objects Of The Study

The main ideal of the study is to critically examine the effect of capital structure on commercial performances of enterprises in Nigeria. The specific objects are to;

1. Determine the relationship between capital structure and cost of capital.

2. Examine the effect of capital structure on commercial performance( in terms of profitability)

3. probe if high cost of capital hinders the companies adopting capability.

Significance Of The Study

This study, thus, contributes to the literature by examining establishment-specific factors that impact the performance of Nigerian enterprises from the view point of their capital structure choices. This helps us to understand the impact of institutional factors on Nigerian enterprises ‟ capital structure choices and how it affects their performance.

utmost exploration studies failed to classify the enterprises into largely and lowly geared which made it delicate to arrive at a dependable conclusion and comparisons, this study thus will help other experimenters to classify between the largely and lowly geared company which will in turn help in reaching dependable conclusions.

The study contributes to the being body of knowledge as it helps to fill up all loopholes arising from other exploration workshop. Also, the findings of this study will prop an effective and effective backing decision of enterprises in Nigeria. Advisers and fiscal judges will find the study helpful in their fiscal and premonitory services to failing and worried companies.

likewise, this exploration work will also contribute by determining the association between fiscal influence and return on asset. It also uses some specific variables( fiscal influence, returns on means and returns on equity) which weren’t used by other workshop in order to give a concrete conclusion in assaying the capital structure on enterprises ‟ performance in Nigeria.

Exploration Thesis

The experimenter tested the truthiness of the statement by either accept or reject the thesis statement at 5 significance position.

thesis 1

Ho There’s no significant relationship between capital structure and cost of capital.

Hi There’s a significant relationship between capital structure and cost of capital

thesis 2

HO There’s no significant relationship between between capital structure and company profitability.

Hi There’s a significant relationship between between capital structure and company profitability

Compass Of Study

The study covers the Impact Of Capital Structure On Commercial Performances Of Manufacturing Companies within the time frame of 2012 to 2016. The company used is Guiness NigeriaPLC.

Limitation of the study

The limited time at the diposal of the experimenter to conclude this exploration design posed as a major limitation to the experimenter as it was delicate to combine academy work and this exploration work completion within the specified period of time.

Description Of Terms

Capital Structure

Capital structure is how a establishment would be suitable to fund its unborn investments systems via debt, equity or mixed. Capital structure was also defined by Roshan( 2009) as a blend of debt and equity capital maintained by a establishment. There’s a sign of stability about the meaning of capital structure if newest description by Narayasanary( 2015) is compared with the aged description by Roshan( 2009) because both of them considers a blend of debt and equity capital which form a company capital structure.

Company Profitability

This is an outgrowth or result of company business operations. That company result is the difference between the company profit and expenditure. Burja( 2011) defined company profit or performance as the direct result of managing colorful profitable coffers and of their effective use within functional, investment and backing conditioning. In this study, company profit was a dependent variable measured by Return on equity and return on asset.

Balance distance

Pandey( 2010) defined balance distance and income statement of a company as follows. He defined balance distance as a statement that indicates the fiscal condition or the state of affairs of a business at a particular moment in time. To give further explanation on this, balance distance consists of information about coffers( means) and company scores( arrears) and possessors finances( equity) at a particular point of time. typically balance distance prepared at a particular date reveal the establishment’s fiscal position at that specific date.

Profit and Loss Account

Pandey( 2010) defined profit and loss account as a score board of the establishment’s performance during a period of time. Since the profit and loss account reflects the results of operations for a period of time, it’s a inflow statement. Profit and loss account represents the summary of earnings, charges and net income or net loss of a company, and net income is the difference between company earnings and charges at a particular fiscal time.