The Relationship between Corporate Performance and Financial Structure: An Empirical Study of Construction and Real Estate Firms in Nigeria

Abstract

This paper evaluates the relationship between corporate performance and financial structure as well as the effect of financial structure on corporate performance of construction and real estate firms in Nigeria. The data were collected from Nigerian Stock Exchange factbook for the period of twenty one years from 1993 to 2013. The unit root test was conducted on the variables and was found to be stationary at the second difference. The Johansen Co-integration was applied to assess the relationship while the pooled OLS was used to determine the effect of financial structure on corporate performance. Two models were developed with two dependent variables: return on assets and return on equity representing firm corporate performance and five independent variables: total debt to equity ratio, total debt to total assets ratio and short term debt to total equity ratio reflecting financial structure; growth opportunity and taxation as control variables. The Johansen Co-integration analysis shows the presence of a long run relationship between corporate performance and financial structure. When return on assets was used as a measure of corporate performance of firms, only debt to equity ratio and growth opportunity exhibited a positive relationship while total debt to total assets ratio, short term debt to total equity ratio and taxation indicated a negative relationship. On the other hand, when return on equity was applied as corporate performance proxy, all the financial structure variables and taxation signalled a negative relationship while growth opportunity showed a positive relationship. Therefore, the findings disclosed that firm’s corporate performance and financial structure are correlated and financial structure negatively affect firm corporate performance. This supports the pecking order theory and consistent with previous studies that financial structure and corporate performance are negatively related. Based on the findings, we may conclude that the optimal financial structure does not play a significant role in the construction and real estate firms listed in Nigerian Stock Exchange. This paper will assist financial managers in making healthier decisions and scholars can develop new idea for further research on the nexus between financial structure and corporate performance of firms.