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Financial Leverage and Market Value of Manufacturing Firms in Nigeria

Paulinus Akpan Ubong, Gabson Daasi PhD and Mrs Dorathy Akpan PhD

Abstract

In today’s dynamic global economy, financial leverage plays a critical role in shaping firms’ strategies and determining their value, especially within Nigeria’s manufacturing sector, which is pivotal to the country's industrial and economic development. Despite the introduction of financial regulations and managerial training, many Nigerian manufacturing firms continue to struggle with optimal leverage levels, raising concerns about declining market valuations. This study examined the effect of financial leverage on the market value of manufacturing firms listed on the Nigerian Exchange Group (NGX). The main objective of this study was to investigate how various financial leverage indicators influence the market value of these firms. The study adopted an ex-post facto research design, utilizing historical financial data from 2015 to 2024. The population comprised 34 manufacturing firms listed on the NGX, from which a purposive sample of 10 firms was selected based on data availability, consistent listing, and sector representation. Secondary data were sourced from annual financial reports and the NGX database. The analysis was conducted using descriptive statistics and panel data regression models, with Tobin’s Q serving as the proxy for market value. The statistical analysis was carried out using E-Views software. The findings revealed that total debt to equity ratio had a significant negative effect on Tobin’s Q, while total debt ratio and equity multiplier had significant positive effects. Interest coverage ratio and long-term debt ratio had insignificant effects. The study concluded that financial leverage significantly affects market value and recommended that firms strategically manage their capital structure by optimizing debt and equity levels to enhance value without incurring excessive financial risk.

Keywords

Financial leverageInterest cover ratioTotal debt-equity ratioMarket valueTobin's Q

References

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