Effect of Financial Leverage on Financial Performance: A Comparative Study of Deposit Money Banks and Manufacturing Companies in Nigeria

  • Imeokparia, Lawrence Department of Economics, Accounting and Finance, College of Management Science, Bells University of Technology, Ota, Ogun State, Nigeria.
  • Adesanmi, David Department of Economics, Accounting and Finance, College of Management Science, Bells University of Technology, Ota, Ogun State, Nigeria.
  • Fadipe, Olubukola Department of Economics, Accounting and Finance, College of Management Science, Bells University of Technology, Ota, Ogun State, Nigeria
Keywords: Financial leverage, financial performance, optimal structure

Abstract

The study assessed effect of financial leverage on financial performance of companies. A comparative study of Nigerian Deposit Money Banks and Manufacturing Companies. The population of the study consists of 24 Deposit Money Banks and 54 Manufacturing Companies quoted on the floor of the Nigerian Stock Exchange as at 31st December 2019. A sample of ten Deposit Money Banks and ten manufacturing companies were selected from the population using convenience sampling techniques based on data availability. Secondary data from the financial results of sampled sectors between 2009-2019 was used. Financial performance (dependent variable) was determined using return on assets (ROA) as a metric, total debt ratio (TDR), total debt to equity ratio (TDER) and interest cover ratio (ICR) was used as proxy for leverage. Firm size was also included as control variable since leverage is not the only determinant of performance. Descriptive, correlation matrix and Pooled Ordinary Least square regression were used to analyse the data obtained. The study revealed that the coefficient of TDR for DMB and manufacturing companies were (-0.30 and 0.01) respectively with p-values of (0.00 and 0.76) and TDER were (-0.00 and -0.30) respectively with p-values of (0.00 and 0.00). ICR has coefficient of 1.99 and probability-value of 0.62 for Deposit Money Banks while manufacturing companies have coefficient of -1.73 with probability-value of 0.00. Firm size has coefficient of 0.02 with a p-value of 0.00 for Deposit Money Banks and manufacturing companies have coefficient of -0.12 with probability value of 0.00. The study discovered that total debt ratio and total debt-equity ratio have a strong negative effect on financial performance of selected Deposit Money Banks. Total Debt ratio has insignificant positive effect on financial performance and Total debt to equity ratio is negatively significant on financial performance of selected manufacturing companies in Nigeria.  The results of the descriptive analysis indicates that 76% of the overall assets of Deposit Money Banks are financed by debts implying that selected financial institutions are highly geared while 48% of the total assets of Manufacturing Companies are financed by debts. The study concluded that leverage is a determinant of performance and therefore recommended that Deposit Money Banks should be conscious of excessive use of debt in order to improve financial performance while manufacturing companies should use debt optimally to finance their assets in order to gain the advantage of debt as stated in the trade-off theory.

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Published
2021-05-20
How to Cite
Lawrence, I., David, A., & Olubukola, F. (2021). Effect of Financial Leverage on Financial Performance: A Comparative Study of Deposit Money Banks and Manufacturing Companies in Nigeria. Global Journal of Accounting, 7(1), 37-46. Retrieved from http://gja.unilag.edu.ng/article/view/1244