Does Leverage affect Profitability and Firm Value of Nigerian Firms? A Panel Modeling of Nigerian Banking Industry

Abstract

The study examines how financial leverage affect the profitability and firm value of deposit money banks in Nigeria. Using an ex post facto design with panel data, the research focused on 13 deposit money banks listed on the Nigerian Exchange Group (NGX) as of 2024, from which nine were purposefully selected. Data for the period from 2008 to 2023 were sourced from the banks' audited financial statements and the NGX Factbook. The panel data analysis utilized the Feasible Generalized Least Squares (FGLS) regression technique to assess the effect of financial leverage on profitability and firm value. The findings show that financial leverage such as the debt-to-equity ratio (DER) and the debt ratio (DR) have a significant positive effect on the banks' profitability. Furthermore, this study reveal that financial leverage has a significant negative effect on firm value of the DMBs. The results suggest that when DMBs increase their debts, they potentially amplify their profitability, but if the increased debts are not managed properly, it may adversely affect their firm value.

Keywords: Financial leverage, profitability, firm value, Nigerian banking industry

DOI: 10.7176/RJFA/15-8-02

Publication date: September 30th 2024