THE EFFECT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF QUOTED INSURANCE COMPANIES IN NIGERIA

THE EFFECT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF QUOTED INSURANCE COMPANIES IN NIGERIA

Abstract

The study examined the impact of capital structure on the profitability of selected quoted insurance companies in Nigeria between 2011 and 2016. The data were obtained from the published financial reports of selected firms. The panel data analysis was employed in the study.

The findings showed that:
Total debt ratio (β= 0.07; p>0.05) and debt-to-equity ratio (β= 0.01; p>0.05) had insignificant positive impact on return on asset of selected quoted insurance firms in Nigeria; The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on return on asset of selected quoted insurance firms in Nigeria (F=2.65; p>0.05); Total debt ratio (β= 0.14; p>0.05) and debt-to-equity ratio (β= 0.08; p>0.05) had insignificant positive impact on return on equity of selected quoted insurance firms in Nigeria; The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on return on equity of selected quoted insurance firms in Nigeria (F= 1.95; p>0.05); Total debt ratio (β=0.08; p>0.05) had insignificant positive impact on net profit margin while debt to equity ratio (β=0.04; p<0.05) had significant positive impact on the net profit margin of selected quoted insurance firms in Nigeria;The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on net profit margin of selected quoted insurance firms in Nigeria (F= 3.55; p<0.05).

The study concludes that capital structure in the form of debt financing and equity financing contributes to the profitability of selected quoted insurance firms in Nigeria, but its influence on profitability is negligible.

The study suggest that; Insurance companies should introduce more debt, especially long-term debt, into their capital structure mix as this will have an automatic effect of reducing the overall cost of capital as a result of its tax advantage that accrue to the organization when this decision is taken, and this often could lead to enhanced profitability of the organizations.

CHAPTER ONE

INTRODUCTION

1.0 Background of Study

The success of insurance companies in Nigeria business environment depends on the ability of the managers to effectively determine the optimal capital mix which is necessary to ensure that they make profit and shareholders get to see that objective fulfilled which is wealth maximization, capital structure decision is very crucial to any organization; it is very difficult to decide the best combination of debt and equity. Capital structure reflects the firms financing strategy. Therefore the optimal capital structure is said to exist when the debt and equity can be combined to reduce the cost of capital and enhance the firms’ profitability (Mohammed & Khalifa, 2014).

Modigliani and Miller (1958) demonstrated the irrelevance of capital structure in firm value, although the assumption is valuable only in perfect market conditions, where all investors have free access to market information, there are zero transaction costs and no tax difference between dividends and capital gains. However, the real economy is far from perfect, and many theories of funding decisions have been developed over time to demonstrate the purpose of the capital structure and its role in shareholder value. (Sorana, 2015)

A capital structure is how a company finances its operations, which can be done through debt or equity, or a combination of both (Brigham, 2004). There are many theories that explain the relationship between profitability and enterprise value. High-growth firms are claimed to have higher debt-to-equity ratios, and bankruptcies have been observed to affect capital structures (Zeituna & Tian, ​​2007). (Kochhar, 1997), a poor capital structure can lead to devaluation or loss of strategic assets. Therefore, a company’s ability to control its financial policies is important.

1.2 Presentation of research topic

The study is being conducted as it was found that a number of studies have been conducted on the impact of capital structure on a company’s profitability, including: B. Impact of Capital Structure on Profitability:
(Ayad and Mustafa, 2015), the impact of capital structure on the profitability of US energy companies (Mohamed and Tailab, 2014), and an empirical analysis of listed Iraqi companies by capital structure and corporate performance:
Evidence from Malaysian listed companies (Salim and Raj, 2012).

There is limited research investigating the factors that influence the capital structure of Nigerian firms. Capital structure issues have received a great deal of attention in developed countries, but have been ignored in developing countries. However, little attention has been paid to the impact of capital structure on the profitability of listed insurers, especially in developing countries such as Nigeria.

If there is one area of ​​financial theory that has received the most attention and generated the most controversy, it is undoubtedly the theory of capital structure and leverage and how they affect corporate performance. The selection has been the subject of some discussion and research. Capital structure and firm value have been the subject of much debate over the years and remain one of the most unsolved problems in the corporate finance literature. Morri and Beretta (2008) explained that a large number of theoretical studies and many empirical studies have addressed these issues, but there is no universally accepted theory, and the capital and return The debate about the importance of sex determinants is still open.

1.3 Purpose of the survey

The overall aim of the study is to examine the impact of capital structure on the profitability of listed insurance companies in Nigeria. Specific goals are:

I study the impact of capital structure on the return on assets of listed insurance companies in Nigeria. It studies the impact of capital structure on the return on capital of listed insurance companies in Nigeria.
A study of the impact of capital structure on the net income of listed insurance companies in Nigeria.
1.4 Research question

Will the capital structure affect the return on assets of listed insurance companies in Nigeria?
Does capital structure affect the return on equity of listed insurance companies in Nigeria?
Does capital structure affect the net profit margins of listed insurance companies in Nigeria? 1.5 Research hypothesis

H01:
Capital structure does not have a significant impact on the return on assets of listed insurance companies in Nigeria.
H02:
Capital structure does not have a significant impact on the return on equity of Nigerian listed insurance companies.
H03:
Capital structure does not have a significant impact on the net profit margins of listed insurance companies in Nigeria.
1.6 Operating model

Go it alone:
Capital structure and return on capital

ROA = f(CAP)

ROA = f(DR, DER)

ROAit = α0 + α1DEit + α2DERit + µ

where:

ROA = return on investment

DR = Debt Ratio

DER= Leverage

i= company cross section; t=time

Goal 2:
Capital structure and return on equity

ROE=f(CAP)

ROE = f(DR, DER)

ROEit = α0 + α1DEit + α2DERit + µ

where:

ROE = return on equity

DR = Debt Ratio

DER= Leverage

i= company cross section; t=time

Goal 3:
Capital structure and net profit margin

NPM = f(CAP)

NPM = f(DR, DER)

NPMit = α0 + α1DEit + α2DERit + µ

where:

NPM = Net Profit Margin

DR = Debt Ratio

DER= Leverage

i= company cross section (i= 1, 2…., 5); t=time (1, 2… 6)

1.6 Scope of investigation

This study examines the impact of capital structure on the profitability of listed insurance companies in Nigeria. Insurer profitability is assessed over a six-year period from 2011 to 2016.

1.7 Validity of research

Gaining knowledge on the impact of capital structure on the financial profitability of listed Nigerian insurance companies will also help financial managers to anticipate potential issues related to funding decisions and achieve shareholder objectives. increase

This study fills a gap and plays a key role in understanding the impact of capital structure decisions on the profitability of listed insurance companies in Nigeria. It also helps financial managers determine and understand the impact of a company’s capital structure on profitability in order to maintain an optimal and ideal capital structure.

It also helps investors considering entering an insurance company to understand and analyze the impact of capital structure on maximizing profitability and objectives. It will also serve as a reference for other researchers in the field of financial management. 1.8 Test organization

This research work is divided into five chapters.

chapter One:
These present the introduction, the problem, the purpose of the research, the research question, the hypothesis, the scope of the research, and the significance of the research.

Chapter II:
This chapter provides an overview of conceptual, theoretical and empirical literature on capital structure and profitability.

Chapter 3:
Describe the research method used.

Chapter 4:
data analysis

Chapter 5:
This chapter contains results, recommendations, and a summary.

1.9 Operational definitions of terms

Capital structure:
This is how companies use various funding sources to fund their overall operations and growth. This is how companies fund their assets with a combination of equity, debt, etc.

Optimal capital structure:
It shows the optimal debt-to-equity ratio for a company to maximize its value. It provides a balance between the liability and equity realms.

Long-term borrowing:
These consist of loans and financial obligations with terms of one year or more.

Current Debt:
These are all company liabilities that are due within a year.

net worth:
Stocks or other securities representing ownership. This is the degree of ownership after all debts associated with the asset have been settled.

Leverage:
It is an investment strategy that uses borrowed money, specifically various financial instruments or borrowed capital, to increase the return on investment. This is the amount of debt used to finance the asset.

dangerous:
This is the possibility that the actual return on your investment may differ from the expected return and you may lose part or all of your original investment.

Financial risk:
This is the potential for shareholders to lose money investing in indebted companies if the company’s cash flows prove insufficient to meet its financial obligations. Business risk:
This is the chance that the company will make lower profits than expected or suffer losses instead of gains.

caution

Abor, J. (2005). Impact of capital structure on profitability:
Empirical analysis of listed companies in Ghana. Journal of Risk Finance, 6(5), 438-445. Aragaw, H. (2015). The impact of capital structure on the profitability of Ethiopian commercial banks. M.sc project submitted to accounting department