THE EFFECT OF FINANCIAL LEVERAGE ON THE PERFORMANCE OF QUOTED MANUFACTURING COMPANIES IN NIGERIA

Eunice Ezeduru, Olajide Omolade, Yushau I. Ango

Abstract


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.


Keywords


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

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