Financial Leverage and Firm Performance in Nigeria's Manufacturing Industry

H. U. Opara; O. T. Ebiringa; U. G. Chris-Ejiogu

doi:10.56201/ijefm.v11.no1.2026.pg138.150

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Financial Leverage and Firm Performance in Nigeria's Manufacturing Industry

H. U. Opara, O. T. Ebiringa, U. G. Chris-Ejiogu

Abstract

This study examines the effect of financial leverage on firm performance in Nigeria's manufacturing industry using panel data from 31 listed companies over 2010-2022. The study employs multiple performance measures (ROA, ROE, EPS) and leverage indicators (debt-to- equity, debt-to-assets, interest coverage ratios) analysed through fixed effects panel regression models. Comprehensive robustness tests, including threshold regression analysis and instrumental variable estimation. The findings reveal consistently negative relationships between leverage and performance across all measures, contradicting trade-off theory while supporting pecking order theory. A one-unit increase in the debt-to-equity ratio is associated with 3.25 percentage point decreases in ROA and 7.89 percentage point decreases in ROE. Threshold analysis identifies critical leverage levels around debt-to-equity ratios of 0.80-0.92, beyond which performance deterioration accelerates dramatically. Negative effects intensify during economic downturns, particularly post-2016 recession, highlighting financial flexibility's value in volatile environments. Significant heterogeneity exists across manufacturing sub-sectors, with capital-intensive industries experiencing stronger negative effects. Financial distress probability serves as the primary mechanism through which leverage impairs performance. Contrary to predictions, asset tangibility exhibits negative performance relationships. The study recommends conservative capital structures with debt-to-equity ratios below 0.80, prioritising internal financing over external debt. The findings challenge developed market theories' universal applicability in emerging economies, emphasising institutional context's critical importance in optimal financing decisions.

Keywords

Financial leveragefirm performancecapital structuremanufacturing industryNigeriaemerging markets

References

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Financial Leverage and Firm Performance in Nigeria's Manufacturing Industry

Abstract

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References

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