The Influence of Financial Structure on Profitability with Special Reference to Oil and Gas Firms in Nigeria

Abstract

This study is an intent to determine the influence of financial structure on profitability with special reference to oil and gas firms in Nigeria. Ten (10) out of the fourteen (14) listed oil and gas firms in Nigerian Stock Exchange were selected. The financial data from 1993 to 2013 were collected from Nigerian Stock Exchange factbook of various issues as relevant. Variation in profitability albeit return on assets, return on equity, profit before tax and earnings per share were regressed on debt-equity amalgam and tax using the pooled ordinary least square, fixed effect and random effect models. After the estimation, results revealed that financial structure has negative influence on profitability of oil and gas firms measured by return on assets, return on equity, profit before tax and earnings per share. This provides credence to the pecking order theory of financial structure which states that firms prefer internal financing before resorting to any form of external funds. In view of the negative influence financial structure has on profitability, we recommend that oil and gas firms in Nigeria should fund their operations with more of equity capital. Inevitably, oil and gas firms globally have been adversely affected by the falling oil prices with their revenues and profit on the decline and as such, borrowing from commercial banks, financial markets and other sources of external financing should be minimize due to high interest rates associated with such facilities.