Effect Of Financial Leverage On Firm’s Performance: A Study Of Nigerian Banks (2006 -2015)

Research Article
Nwanna Ifeanyi Onyenwe and Ivie Glory
Financial leverage, Liquidity, market capitalisation profitability and efficiency.

This study investigated the effect of financial leverage measures on firm’s performance. The study was carried out on thirteen deposit-money banks listed on the Nigerian Stock Exchange floor for a period of ten years from 2006 to 2015. Financial leverage was decomposed into debt ratio, debtequity ratio and interest coverage ratio. Performance areas under study were profitability, size, liquidity, efficiency and market capitalization value, all measured using relevant ratios. Data were collated from annual reports of companies and analysed with the ordinary least square multiple regression technique to investigate for the effects of financial leverage ratios on performance ratios. Models were formulated for each hypothesis and tested using the R square, adjusted R square and calculated f figures. The empirical results revealed that financial leverage has positive effect on profitability and efficiency. No significant effects were found on liquidity, size and market capitalisation value. The findings implied that the use of debt improves managerial efficiency as managers will have to ensure more profit is made to pay interests and still be profitable. Interests which are tax deductible were also found to reduce tax and improve profitability. It was recommended that debt should be employed in such capacity that the costs do not outweigh the benefits. Management should also ensure that financial decisions taken are in consonance with the shareholders’ wealth maximization objectives which encompass the profit maximization objective of the firms.