Capital Structure and Financial Performance of Listed Commercial Banks in Nigeria: The Moderating Effect of Board Diligence

Abstract

Capital structure is an essential managerial decision as it shows how well an entity can harness available resources to achieve desirable results. This study examined the relationship between capital structure (CS) and corporate financial performance (CFP) of deposit money banks (DMBs) listed on the Nigerian Stock Exchange. The study also examined the moderating effect of board diligence on the relationship between CS and CFP. The study used the ex post facto research design and data from thirteen (13) DMBs over the period 2010 to 2018, and multiple regression was used to analysed the data. The results revealed a negative and insignificant relationship between debt ratio and return on assets (ROA), a negative and insignificant relationship between debt ratio and net profit margin (NPM), and a positive and significant relationship between equity ratio and ROA. It further revealed a positive and significant relationship between equity ratio and NPM. Firm size had a significant, positive relationship with firm performance, while firm age was negatively related to both ROA and NPM. The results further showed that board diligence positively moderates the relationship between capital structure (CS) and financial performance (CFP) in the banking industry. The study therefore concluded that the relationship between debt and CFP is negative though statistically insignificant, whereas the relationship between equity and CFP is positive. and statistically significant.. The implications of these results are that banks should emphasise more on equity capital than debt capital in their capital structure decisions, and boards must be allowed to play their role to foster healthy financial performance.