FINANCIAL LEVERAGE AND MANUFACTURING FIRMS PERFORMANCE IN NIGERIA

Abstract

A company's level of financial leverage is one of the main elements affecting its financial performance and sensitivity to changes in its capital structure. In an attempt to quantify this relationship, Tobin's Q was employed as the dependent variable, while measurements for the independent variables were debt-equity ratio (DER), total assets (TA), debt-ratio (DR), equity-ratio (ER), and current-ratio (CUR). The study employed the panel unit root technique to evaluate the stationarity of the variables. Similarly, a panel technique comprising pooled least squares, random-effect, and fixed-effect was used to assess the secondary data from the annual reports of the selected quoted manufacturing businesses in Nigeria from 2011 to 2021.The panel unit root test data showed that while ER, TA, DER, and CUR were stationary at level (1), DR and Tobin's Q were stationary at first order. Additionally, the study conducted the Hausman Test, which validated the selection of the fixed effect model. Empirical findings from the fixed effect model revealed a significant positive correlation between Tobin's Q and the debt and current ratios. However, it was found that the debt-to-equity ratio and equity ratio had a major negative impact on the performance of Nigerian manufacturing companies. Based on the findings, the study concluded that a company's financial performance will be improved by using financial leverage to finance its operations because it will enable them to reduce their taxable income. Based on these results, the report recommended that Nigerian manufacturing enterprises seek to reduce tax expenditures through effective tax planning and boost the firm's worth by incorporating leverage into their capital structure through outside finance. This will not only increase after-tax income but also remove any possible conflicts of interest between stockholders in manufacturing companies and financial managers.