Eunice Ezeduru, Olajide Omolade, Yushau I. Ango


The debt-to-equity ratio of a firm determines how cash flows will be shared between equity holders and debt holders. Financial managers face difficulty in determining the optimal leverage. The main objective of this study is to determine the effect of financial leverage on the performance of quoted Manufacturing firms in Nigeria. The sample data was extracted from 92 manufacturing companies registered by the Nigerian stock exchange (NSE) from the period 2007 to 2016. Return on Equity (ROE), Return on Asset (ROA) and Return on Investment (ROI) represent performance of dependent variables. While Debt/Equity ratio represent financial leverage as independent variable. Simple Least Square regression method was used as a tool of data analysis and findings of the paper reveal that, Debt to equity ratio has insignificant effect on the performance of quoted Manufacturing firms in Nigeria, it also shows a positive effect relationship between financial leverage and Debt to equity ratio. The coefficient of determination shows 81% of the total variation in the dependent variable (Leverage) can be explained by the explanatory variables (Debt to equity ratio). Therefore it is recommended that, management of quoted manufacturing firms should work very hard to improve their financial leverage in order to increase Debt equity ratio such as return on assets, returns on equity and return on investment and earnings from their business transaction. The Management of Nigerian quoted manufacturing firms must caution against the apparent benefits of greater leverage simply as a device for controlling managerial opportunistic behavior.


Debt equity ratio, Leverage, Return on equity, Return on asset, and Return on investment.

Full Text:



Bettis, R.A., (1983), “Modern Financial Theory, Corporate Strategy and Public Policy: Three Conundrums,” Academy of Management Review 8, Pp. 406-415.

Bevan,.A. and Danbolt, J. (2002), ‘‘Capital Structure and its Determinants in the United Kingdom: A decomposition analysis’’. Working Paper Department of Accounting and Finance, University of Glasgow.

Booth et al, (2001), ‘‘CorporateStructure in developing Countries’’. The Journal of Finance, 56(1),97-129.

Borodo, B.M. (2010), ‘‘Manufacturing Financing Industrial Development’’, A paper presented at a Conference on State of the Nigerian Economy: Strategic Options for Building and Sustaining a Vibrant Economy. The Commonwealth Club London, England.

Bowman, J. (1980),‘‘The Importance of a Market Value Measurement of Debt in Assessing Leverage’’. Journal of Accounting Research 18,242-54.

Bradley, M. et al. (1984), ‘‘On the existence of an optimal Capital Structure: Theory and Evidence’’. Journal of Finance 39, 857-880.

Brander, J.A. and T.R. Lewis, (1986), “Oligopoly and Financial Structure: The Limited Liability Effect,” American Economic Review 76, pp. 956-970.

Brennan, M. et al (1978), ‘‘Corporate Income Taxes, Valuation and the Problem of Optimal Capital Structure’’.Journal of Business.

Bromiley, P., (1990), “On the Use of Financial Theory in Strategic Management,” Advances in Strategic Management 6, pp. 71-98.

Brounen, S. and Eitchholtz, P. M. (2001), ‘‘Capital Structure Theory: Evidence from European Properties Companies Capital Offerings’’ Real Estate Economics, Vol. 21, No.4 Capital Structure and Value of the Firm, (Accessed on 15/06/2007) Available at

Central Bank of Nigeria (CBN) Credit Policy Guidelines of 2003 to 2007 Budget.

Chan, L. et al. (2003), ‘‘The Leverage and persistence of Growth Rates’’.Journal of Finance.

Chatterjee, S. and B. Wernerfelt, (1991), “The Link Between Resources and Type of Diversification: Theory and Evidence,” Strategic Management Journal 12, pp. 33-48.

Chatterjee, S., (1990), “Excess Resources, Utilization Costs, and Mode of Entry,” Academy of Management Journal 33, pp. 780-800.

Chen, J. J. (2004), ‘‘Determinants of Capital Structure of Chinese Listed companies’’. Journal of Business Research 57, 1341-1351.

Chi, T.,( 1994) “Trading in Strategic Resources: Necessary Conditions, Transaction Cost Problems, and Choice of Exchange Structure,” Strategic Management Journal 15, , pp. 271-290.

Chittendale, F. et al. (1996), ‘‘Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation’’. Small Business Economics: 8,59-67.

Cohen, R.D. (2004), ‘‘Papers on M&M,WACC curve & optimal capital structure’’. (Accessed: 16th July 2007) Available at on 16/07/2007.

Collis, D.J., “Research Note: How Valuable are Organizational Capabilities?,” Strategic Management Journal 15, Winter Special Issue, 1994, Pp. 143-152.

De Angelo H, and Masulis R. (1980), ‘‘Optimal Capital Structure under Corporate and personal taxation’’.Journal of Financial Economic, 8, 3-29.

Deesomsak et al, (2004), ‘‘The Determinants of Capital Structure: Evidence from Asia Pacific region’’. Journal of Multinational Financial Management 14, 387-405.

Diamond, D.W. and Verrecchia, R.E.(1991), “Disclosure, Liquidity, and the Cost of Capital,” Journal of Finance 46, Pp. 1325-1359.

Diamond, D.W.(1994), “Corporate Capital Structure: The Control Roles of Bank and Public Debt with Taxes and Costly Bankruptcy,” Economic Quarterly 80, Pp. 11-37.

Dierickx, I. and Cool, K.(1989), “Asset Stock Accumulation and Sustainability of Competitive Advantage,” Management Science 35, Pp. 1504-1511.

Easterbrook, F. (1986), ‘‘Two Agency Cost Explanations of Dividend’’. American Economic Review 74, 650-659

Ekwere, U. (2010), ‘‘Making Nigerian Economy Competitive through Manufacturing’’ (Accessed:29th May, 2010) Available at

Ellsworth, R.R.(1983), “Subordinate Financial Policy to Corporate Strategy,” Harvard Business Review 61(6), Pp. 170 - 182.

Fama, E. and French K. (2000), ‘‘Testing Trade off and pecking order predictions about Dividend and Debt’’. Working Paper University of Chicago and Sloan School of Management Review of Financial Studies 15, 1-33.

Fama, E.F. and M.C. Jensen, (1983), “Agency Problems and Residual Claims,” Journal of Law and Economics 26, Pp. 301-326.

France and Hall et al, (2004), ‘‘Determinants of the Capital Structure of European SMEs’’ Journal of Business Finance and Accounting

Fridson, M.S., (1994), “Do High-Yield Bonds Have an Equity Component?” Financial Management 23, pp. 82-84.

Galai, D. and Masulis, R. (1976), ‘‘The Option Pricing Model and the Risk factor of stock’’. Journal of Financial Economics 3, 53-81.

Garba, T. (2005), ‘‘Capital Structure and Firm Value: A Test of Modigliani and Miller Irrelevance Theories’’. Journal of Accounting Research, No 3 Pp. 51-57

Gerlach, M., (1987), “Business Alliances and the Strategy of the Japanese Firm,” California Management Review 30(1), Pp. 126-142

Gertner, R., R. Gibbons, and D. Scharfstein, (1988)“Simultaneous Signalling to the Capital and Product Markets,” RAND Journal of Economics 19, Pp. 173-190.

Grant, R.M., (1988), “On ‘Dominant Logic’, Relatedness and the Link Between Diversity and Performance,” Strategic Management Journal 9, Pp. 639-642.

Green, C. J. et al (2003), ‘‘Corporate financial structure in India’’.South Asian Economic Journal 4, Pp245-274.

Gupta, U., (1995), “How Much?”Wall Street Journal, May 22, p. R7.


  • There are currently no refbacks.