CAPITAL STRUCTURE AND FIRM FINANCIAL PERFORMANCE IN NIGERIA: EMPIRICAL EVIDENCE OF THE CAUSAL LINK

The paper examines the link between capital structure and firm financial performance in Nigeria on basis of panel research design with secondary data spanning 2010-2014 financial year for seventy (75) sampled companies quoted in the Nigerian Stock Exchange was analysed. The data estimation technique was the 2SLS which is suitable in study perceived not be devoid of endogeneity. The result revealed that leverage as proxy by ratio of noncurrent liability to equity (NCLEQ) seems not to exhibit causality with financial performance (RETOA) vice-versa. However, there seems to be the presence of bidirectional causality between current liability expressed as a ratio to equity (CULEQ) and RETOA. Also, there is simultaneous causal link between Equity express as a ratio to overall assets (EQTTA) and RETOA. The study therefore concludes that capital structure (CULEQ and EQTTA) determines financial performance (RETOA) while simultaneously, financial performance determines capital structure in Nigeria. The study recommends that firms should have apposite capital structure mix, specifically ratio of NCLEQ to CULEQ and a good spread of both institutional and insider shareholdings.