Effect of Capital Structure on Liquidity and Growth: Evidence from the Nigerian Manufacturing Industry

Abstract

Capital structure decision is critical to a firm’s liquidity, profitability, growth and shareholder value. Theoretical guidance suggests a positive relationship between capital structure, corporate liquidity, and growth, while observable results suggests varied mixed relationships. In this study, we examine the relationship between capital structure, corporate liquidity and growth utilizing data from twenty listed Nigerian manufacturing companies, using the pooled ordinary least square regression and Random-effect GLS regression model of panel data technique. Our result suggests that there is a negative relationship between capital structure and corporate liquidity. We find also a positive relationship between profitability ratio and two debt ratios. However, we find a consistently negative coefficient for total debts to equity ratio, while three debt ratios relate positively to revenue growth. We thus recommend that financial managers analyse the costs and benefits of debt in choosing the optimal capital structure.

Keywords: Capital Structure, Corporate Liquidity, Growth, and Manufacturing

DOI: 10.7176/RJFA/13-8-04

Publication date: April 30^th 2022