Empirical 6
Empirical 6
Empirical 6
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
Abstract: The concept of debt financing has assumed considerable importance in recent years given the fundamental role debts
now play in forming the financial structure of corporate firms. Quite evident in the debt finance literature is the juxtaposition
between debt financing and corporate performance which suggests that debt financing can influence corporate performance.
Against the narrow measures of debt financing which are common with most studies that have been carried out on the debt
finance-performance dynamics; we attempted a more robust combination of debt finance choices in modelling for corporate
performance. Based on data gleaned from the audited annual reports of fifteen (15) consumer goods firms listed in the Nigerian
Stock Exchange (NSE) for the period 2006 to 2017, results of the panel regression technique revealed that total debt, long-term
debt and short-term debt to asset ratios positively influence the performance of consumer goods firms in Nigeria. Based on the
findings of the study, we recommend, among others, that there is need for the Nigerian firms to rely less on short-term debts, which
forms the major part of their leverage, and focus more on developing internal strategies that can help improve their performance.
Keywords: Short term debts, Long term debts, Total Debts, Corporate Performance, Consumer goods.
long term debt. The financial system in emerging economies,
including Nigeria, is punctuated with poor debt markets. The
1. INTRODUCTION
external debt finance of most firms is mainly short term
Corporate financing has somewhat become topical and finance and greater reliance are placed on banks or other
attracted a great deal of public interest as a result of its financial institutions for most of the external funds, thereby
significance regarding investment decisions and economic imposing extra burdens on the firms in the shape of
wellbeing of firms. Indeed, the topicality of the concept has exorbitant cost. This may account for the reasons why some
manifested in various studies, both in the developed and scholars adopt different measures of debt ratio as against
emerging economies. Though in exhaustive, these studies narrow measure of debt financial structure (For example,
have mainly emphasized the choice of debt against equity Chen, 2004; Khan, 2012; Ong Tze-Sam & Heng, 2011;
structure, otherwise referred to as firm’s capital structure, Zeitun & Tian, 2007). Mismatching funds is when long term
with a single leverage variant the dominant variable. The investments are financed by short term debts rather than long
idea of debt as a non-heterogeneous source of funds is a term debts.
strong theoretical construct, but studies that transcend
leverage decision and explore other dimensions of the debt Literature has shown that debt structure decisions are among
choice are necessary. This is because the nature of debt the most important finance decisions firms encounter. The
finance and its incentive features can change with its debate still remains until the present day whether such
maturity (short or long) and fund providers (capital markets decisions influence costs of capital and firm values.
or banks). According to Harelimana (2015), debt financing decision
refers to the financial framework of debt levels maintained
Therefore, it is essential that a study of debts structure by an entity. It is vital to managers by reason of the fact that
involves an examination of the individual effects of all debt it constitutes the basis for making financing decisions in any
variants such as short-term debt, long-term debt and total firm. Basically, the choice of debt structure a firm adopts is
debt due to their different risk and return profiles (Zuraidah both financial and marketing problem and it depends on the
et al., 2012). Moreover, using different components as risk and return characteristics of such firm and/or its
measure of debt structure as against narrow measure will management (Tudose, 2012). Realistically, it is difficult to
normally reveal occurrence of mismatch of funding by firms determine a firm’s debt structure because the exact optimal
(Chen, 2004; Khan, 2012; Zeitun & Tian, 2007), which can debt mix can hardly be determined. For this reason, the firm
hardly be revealed by a constricted study of debt structure. must issue different securities in a countless mixtures to
Lucey and Zhang (2011) highlighted long and short term produce the combination that maximizes its overall value
debt ratios as good measure of leverage ratios in developing (San & Heng, 2011), and increase performance. Optimal
countries because of the fund mismatch caused by limited debt structure means a combination of funds which
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
minimizes the weighted average cost of capital (WACC) and The remainder of this paper is organized as follows: Section
increases firm value. two provides the literature review on debt structure and firm
performance. Section three discusses the theoretical
The copious literature on the finance choice between debt framework for the study. Section four and section five focus
and equity dwarfs studies on corporate debt on the methodology and analysis of results respectively.
structure/performance dynamics. In other words, while Lastly, section six concludes the study with some
several studies abound on the determinants of financing mix recommendations.
(both debt and equity structure), relatively only a handful of
2. LITERATURE REVIEW
them are on the effects of debt structure on corporate
performance, especially in the developing countries. The 2.1 Concept of Corporate Performance
work of Jensen and Meckling (1976) was one of the early The term corporate performance refers to the benefits
studies on the interaction between capital structure and firm emanating from shares and those from the functioning and
performance. However, over the last decades, a number of operational activities of a firm (Rouf, 2012). The
other studies have been performed to investigate the relation performance a firm can be analysed via its financial
of financial leverage with firm performance, but empirical statements such as the statements of financial position,
evidence regarding this relationship have been found to be comprehensive incomes, cash flow and statement of cash
contradictory and inconclusive. In this regard, two basic flows. Broadly speaking, the performance of a firm can be
strands of findings exist in extant literature. Studies in the analysed via the use of financial ratios which express
first strand, including those of John and Senbet (1998), Abor relationships between variables reported in financial
(2005), Zeitun and Tian (2007), Onaolapo and statements of firms (Latridis, 2010). Financial ratios are
Kajolan(2010), and Taiwo and Olayinka, (2012) document useful and can meaningfully be used as performance
positive relationship between debt financing and corporate measures when compared with other related meaningful
performance. In the other strand, studies like Zeitun and Tian information, either at present or past similar indicator(s) for
(2007), Ebaid (2009), Liew (2010), Majumdar and Sen the same firm or similar firms in the same industry.
(2010), and Luper and Kwanum (2012) report negative
relationship between debt financing and firm performance. According to Akle (2011), accounting-based measurements
Although, some other studies, such as Shoaib (2012) and San are generally considered as an effective indicator of a firm’s
and Heng, (2011) discover that most firms lack optimal debt performance. Accounting-based measurement indicates the
financing structure because managers are not motivated to profitability of firms on the short-term in the past years.
maximize corporate performance as their compensation are Thus, it assists management is measuring the firm's overall
not performance oriented. efficiency. It is usually used as a measure for earnings
generated by a firm during a period of time based on its level
Due to these empirical inconsistencies, and given that most of sales, assets, capital employed, net worth and earnings. It
studies on the link between firm financial structure and is considered an indicator of growth, success and control.
performance are domiciled in the developed countries of Shareholders also are interested in profitability since it
Europe, America and Asia, a study based on empirical indicates the progress and the rate of return on their
evidence from an emerging economy like Nigeria becomes investments
warranted. The economies of the countries within these
continents are reasonably stable, and so, it will be misleading In the accounting literature, corporate performance can be
to assume that results of studies carried out in those countries measured by means of profitability indicators such as
can be used to draw reliable conclusions on the emerging earnings per share (EPS), dividend per share (DPS), return
economies within the African continents because of the on asset (ROA), return on equity (ROE), operating profit
peculiarities associated with the different economies. For (OP), return on capital employed (ROCE), profit margin
example, the regulatory framework, general business, legal (PM), return on investment (ROI) or market-based
and audit environment of the developed countries are very measurement ratios like Tobin’s Q, market value added
much different from those of the developing countries. All (MVA), market-to-book value (MTBV), annual stock return
these factors could alter the result of a study. This means that (RET) among others. In view of the aforementioned, this
country-specific findings will be important in provoking a study shall focus on profitability measure of performance
global discourse of the association between debt financial such as the return on asset (ROA).
and corporate performance. This is a gap in literature upon
which our study is deeply rooted. In filling this gap, we 2.2 Debt Financing and Corporate Performance
attempted a robust combination of debt finance choices of Mizra (2013) identified capital structure as one of the
short-term debt to asset ratio, long-term debt to asset ratio internal dynamics that affect firm performance. Capital
and total debts to asset ratio in modelling for corporate structure is to the ratio of debt and equity financing. In case
performance within the Nigerian environment. of more debt financing, a firm has to face certain bankruptcy
risk, but there are also some tax benefits associated with debt
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
financing (Su & Vo, 2010). A study by Oguna (2014) on the (as measured by return on assets). On the flip side, findings
effect of capital structure on the financial performance of of the study carried out by Makanga (2015) revealed a
firms listed in the Nigerian Stock Exchange established that negative but insignificant relationship between short-term
long-term debt had a significant negative relationship with debt and corporate performance (return on assets). Hence,
return on equity, which means the leverage has effect in the we propose that:
long term but not short term. This study focused on the debt HO2: There is no significant relationship between short
component of capital structure via the divide of total debts, term debts to asset ratio and corporate performance
long-term debts and short-term debts. Consequently, these
debt components of capital structure (i.e. variables of the .2.2.3 Total Debts and Corporate Performance
study) are briefly discussed.
Although, Khan (2012) and Amjed (2011) argue that the
2.2.1 Long-term Debts and Corporate Performance different types of debts instruments (such as short term
Long-term debts show the percentage of assets financed with debts, long term debt, or both of them) have different rate of
debt which is payable after more than one year. It includes returns investors will ask for, different risk element and by
bonds and long-term loans. Generally, these bonds and implication exert different impact on corporate performance,
loans carry a higher interest rate, as lenders demand a higher some researchers including Abor (2007) and Michaelas,
return in exchange for taking on the greater risk of loaning Chittenden and Putziouris (1999) caution that determining a
money over a long period of time. In reality, long-term debt single optimal leverage level and trying to establish a
limits managerial discretion by making access to new funds relationship between the debt level and corporate
and over-investment less likely (Hart & Moore, 1995). A performance is likely to result in spurious conclusions. The
study by Hernandez-Canovas and Koeter-Kant (2008) reason offered by Hutchinson et al., (1998) and Van der
suggests that the most significant variables in determining a Wijst and Thurik, (1993) is that the effects of long and short
firm’s performance are the long-term debts. Empirical term debts tend to cancel out if aggregated.
evidences such as Onoja and Ovayioza, (2015), Yan (2013);
and Zeitun and Tian (2007) find clear evidence of a positive Sheikh and Wang (2011), examined non-financial firms
relationship between long-term debt and firms’ performance listed on the Karachi Stock Exchange (KSE) in Pakistan and
variants of return on assets (ROA) and return on equity documented a negative relationship between total debt ratio
(ROE). On the other hand, Onaolapo & Kajola (2010) found and firm performance. On the other hand, Saeedi and
negative relationship between long-term debt and Mahmoodi (2011) investigated the connection between
profitability, while Makanga (2015) reported a negative capital structure and firm performance among firms listed on
correlation between long-term debt and firm performance Tehran Stock Exchange and recorded a positive relation
proxied by return on assets. Based on the review above, we between debt ratio and firm performance. In a different study
therefore proposed the following hypothesis: performed by Boroujeni et al (2013), both long term and
total debt ratios were found to be positively correlated with
HO1: There is no significant relationship between long term firm performance. Makanga (2015) found a weak negative
debts to asset ratio and corporate performance correlation between total debts and return on assets
2.2.2 Short-Term Debts and Corporate Performance (performance). Based on the review above, we propose the
following hypothesis:
In reality, the amount of outstanding short-term debts is an HO3: There is no significant relationship between Total
important measure of a firm’s financial health. Short-term debts to asset ratio and corporate performance
debt is the best financing tool since it is perceived to be
cheaper or less costly for firms (Nwude, Itiri, & Agbadua, 2.2.4 Firm Size and Corporate Performance
2016). According to Olaniyi, et.al (2015), short-term debt is
an account shown in the current liabilities portion of a firm’s It is plausible that other factors may jointly influence debt
statement of financial position and it comprises of any debt financing or corporate performance and therefore cause
incurred by a firm that is due within a year period. The debt spurious correlation (Richardson, Taylor & Lanis, 2013). For
in a firm’s liabilities account is usually made up of short- this reason, firm size was included in this study as a control
term bank loans among other types. According to Garcia- variable. This is essential because firm size accounts for the
Terul & Martinez-Solano (2007), short-term debt is scale and scope of a firm's operations. Firm size is usually
positively correlated with firm’s growth opportunities. calculated by taking the logarithm of total assets. In this
Moreover, Onoja & Ovayioza (2015) found that short-term study, firm size is calculated by taking the logarithm of total
debts are superior for limiting managerial discretion and assets. In the accounting literature, prior studies conducted
reducing moral hazard on the firm’s side. Equally, studies by Mohammad & Jaafer (2012); and Kebewar (2012) find
by Onoja & Ovayioza (2015), Yan (2013); Weill (2008); and clear evidence that corporate performance is positively
Zeitun & Tian (2007) found evidence in support of a positive related with firm size. On the basis of the findings of prior
association between short-term debt and firms’ profitability
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
eit = Error term years (time series) with a sample of listed firms (cross-
α = Constant term section).
βS = Coefficients of the explanatory variables
5. PRESENTATION AND ANALYSIS OF RESULT
4.3 Research Design, Sampling and Data Estimation 5.1 Descriptive Statistics
Technique Presented in Table 4.1 is the descriptive statistics of the
This study employed ex-post facto research design. This dependent (return on asset: ROA), independent (total debts
research design was adopted because it seeks to analyse to assets ratio, long term debts to assets ratio and short term
secondary data which can hardly be manipulated by the debts to assets ratio) and control (firm size) variables.
researchers. The population of the study comprises the entire Table 4: Descriptive Statistics (Dependent, Independent
45 manufacturing firms quoted on the Nigerian Stock and Control Variables)
Exchange (NSE) as at 31 December, 2017. But, since our
population of interest covers only the listed consumer goods
firms in Nigeria, the target population becomes the entire 22
consumer goods firms quoted on the Nigerian Stock
Exchange (NSE). The consumer goods subsector was chosen
over others because it is one of the least investigated sectors
of the NSE. To cut costs, a representative sample size of 20
firms derived using the Yamani's (1967) scientific approach Source: Researchers’ Computation, 2018
to sample determination was adopted.
It can be seen that the mean value of ROA, TATS, LTDS,
To ensure that the 20 sample firms are given equal STDS and SIZE are 6.2963, 1.5610, 1.2532, 0.3078 and
opportunity of being selected, the probabilistic sampling 5.1246 respectively with standard deviations of 14.4805,
approach was adopted with emphasis on a simple random 0.4512, 0.3855, 0.1944 and 0.6822 respectively. The
sampling technique. However, a final sample size of 15 maximum value of the variables was recorded by ROA with
consumer goods firms was selected based on certain criteria: value 28.57 and its minimum value (-88.99). The descriptive
The first criterion was that sample units included in the study statistics of mean and standard deviation implies that the
hold a complete twelve years financial statement data. variables are relatively clustered around the mean of 6.3%,
Therefore, firms with missing data for a period covering 1.6%, 1.3%, 0.31% and 5.1% for ROA, TATS, LTDS, STDS
twelve years from 2006 to 2017 were excluded from the and SIZE respectively.
study. Secondly, firms that ceased operation at any point 5.2 Correlation Analysis
during the period of study were excluded. The statistical Presented in Table 4.2 is the correlation matrix of the
formula is stated as follows: dependent, independent and control variables of the study.
n= N The correlation matrix is used to establish if there is
1 + N (e2) multicollinearity between pairs of independent variables
Where: n = sample size (TATS, LTDS, and STDS).
N = population size (target)
e = level of significance desired (0.05 on the basis of Table 4.2: Correlation Matrix (Dependent, Independent
95% confidence level) and Control Variables)
Data used for analysis in the study were extracted from the
published financial statements of the firms covering a period
of 12 years from 2006 to 2017. This was supported, where
required, with the financial information of the firms as
contained in the Nigeria Stock Exchange (NSE) fact book.
Both descriptive statistics (such as mean, standard deviation, Source: Researchers’ Computation, 2018
and minimum, maximum) and inferential statistics (such as
the panel regression model) were used to analyse the study It can be seen that there is multicollinearity among the
data. The data obtained were subjected to regression analysis variables of the variable since the Pearson correlation
via STATA 13.0 version. Moreover, to establish the coefficient exceeds 0.8. This position was further resolved
accuracy of the research model, we performed the classical by the Breusch-Pagan/Cook-Weisberg test for
regression assumption test of normality, heteroskedasticity, heteroskedasticity.
multi-collinearity and serial correlation. The panel regression Table 4.3: Heteroskedasticity Test Results
technique was employed to enable us investigate the
connection between corporate performance (dependent
variable) and (explanatory variables) debt financing over 12
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
Hypothesis II
HO2: There is no significant relationship between short-
term debts to asset ratio and corporate performance
Hypothesis I
HO1: There is no significant relationship between long-
term debts to asset ratio and corporate performance
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
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International Journal of Academic Accounting, Finance & Management Research (IJAAFMR)
ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
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ISSN: 2000-008X
Vol. 3 Issue 5, May – 2019, Pages: 26-34
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