Financial leverage and Firm Financial Performance in Nigeria: A Panel Data Analysis Approach
This study examined the relationship between financial leverage and firm financial performance in Nigeria using 80 non-financial firms quoted on the Nigerian Stock Exchange from 2000 to 2015. The total debt to capital ratio, debt to equity ratio, cost of debt, debt to asset ratio and long term debt to capital ratios were proxies for financial leverage. Panel data technique in the form of the pooled regression model, fixed effect model, random effect model, and the marginal model had been applied to test hypotheses. The findings of the study revealed earnings per share is significant and negatively related to the debt to equity ratio and the total debt to total asset measures of financial leverage while the return on equity shows an insignificant relationship with the financial leverage measures in Nigeria while the direction of the relationship differs from one variable to the other. It was positive with the total debt to capital ratio and the cost of debt while the total debt to asset ratio, long term debt to capital ratios and the debt to equity ratio was negative. We, therefore recommend that the management of quoted firms in Nigeria should be careful in their employment of leverage so that the cost of debt does not outweigh its benefits as proposed by the tradeoff theory.
