Implication of Financial Leverage on Performance of Listed Manufacturing Companies in Nigeria

Abstract

The study examined the impact of financial leverage on the performance of listed manufacturing companies in Nigeria. Specifically, it assessed how the debt-to-assets ratio, debt-to-equity ratio, short-term leverage, and long-term leverage influence the stock returns of these companies. Extant literature was reviewed, and the study was anchored on the Trade-off Theory and the Pecking Order Theory. An ex post facto research design was adopted. The study population comprised forty-three (43) manufacturing companies listed on the Nigerian Exchange Group, and the filtering method was employed to select a sample size of twenty-eight (28) manufacturing companies. The study utilized secondary data sources. The panel dataset was derived from the annual reports of listed manufacturing companies spanning 2014 to 2023. The data comprised short-term debt, long-term debt, total debt, equity, book values of common and preferred shares, total assets, and market prices of shares. The study employed panel estimation techniques and pooled OLS for data analysis. Findings revealed that the debt-to-assets ratio and debt-to-equity ratio exert significant positive effects on stock returns of listed manufacturing companies in Nigeria. However, short-term leverage and long-term leverage did not significantly affect stock returns. The study therefore recommends that the management of manufacturing firms should employ more sustainable debt funding for demanding and crucial sections of the firm in order to increase or grow the firm’s investment in assets. Additionally, managers of manufacturing firms should utilize the lowest possible level of debt or maintain an optimum debt level that does not exert an adverse influence on the firm’s performance.