Effect of Capital Structure, Liquidity on Performance: Evidence from Deposit Money Banks in Nigeria

Abstract

This study examined the effect of capital structure and liquidity on the performance of deposit money banks (DMB’s) in Nigeria using 10 quoted DMB’s in Nigeria from the year 2009 to 2019. The dependent variables are return on asset (ROA) and return on equity (ROE) while the independent variables are short term debt (STD), long term debt (LTD), debt equity ratio (D/E), current ratio (CA) and quick cash ratio (CASH). STD, LTD and D/E are proxies for capital structure while CA and CASH as proxies for liquidity. The study also controls for asset tangibility and firm size. The data were analyzed using the panel estimator based on the pooled effect model, fixed effect model and random effect model.The results revealed that debt equity ratio has significant negative effect on return on asset and return on equity. Short term debt and long-term debt have negative effect on return on asset but has positive effect on return on equity. The findings also revealed that current ratio and quick cash ratio has negative effect on return on asset but have positive effect on return on equity. Tangibility of asset has positive significant effect on return on asset but negative effect on return on equity. Firm size has positive effect on both return on asset and return on equity.Based on the findings, the study recommends that business managers should keep debt equity ratio at the point that is optimal, any excess increase in debt will have negative impact on profitability. Business managers tend to find a meeting point for debt structure that will favourably affect both equity provider and the business at large. Banks should invest the excess liquidity on value increasing activities to drive profitability. Policy marker should install more policies to carter for the excess liquidity.

Keywords: Short Term Debt, Long Term Debt, Debt-Equity, Current ratio, Quick Ratio, Cash. Profitability

DOI: 10.7176/RJFA/12-14-01

Publication date:July 31^st 2021