Corporate Leverage and Financial Performance: Evidence from Quoted Commercial Banks in Nigeria
Abstract
This study examined the effect of leverage on the financial performance of quoted commercial banks in Nigeria. It covers the period 2014-2023 and used a sample of thirteen quoted commercial banks on the Nigerian Exchange Group. Return on equity was proxy for dependent variables while Total Debt Ratio measures as total asset to total debt, Debt Equity Ratio measures as total debt to total equity, Short Term Debt Ratio measures as total assets to total short term debt, Long Term Debt Ratio measures as total assets to total short term debt and Time Interest Earned Ratio measures as interest charge to earnings before interest and tax. The study used the fixed effect model to analyze data collected and findings of the study showed that short term debt and total debt have negative impact on return on equity of the selected commercial banks. The regression coefficient proved that a unit increase in the variables will lead to 0.3% and 1.0% decrease in return on assets. The model found that long term debt, debt equity ratio and interest earned ratio have positive impact on return on assets of the selected commercial banks. The study concludes that leverage significantly affects commercial banks financial performance as it enhances managerial efficiency. This is so, as managers are burdened with the payment of interest, thus, leaving few cash flows for perquisites; thus, aligning their interest with that of shareholders. The study recommended that since financial leverage decision is very critical to the survival and performance of banks, an appropriate debt-equity mix should be adopted, so as to improve their financial performance and remain competitive.
Keywords
Corporate LeverageFinancial PerformanceQuoted Commercial BanksNigeria
References
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