CAPITAL STRUCTURE AND FIRM PERFORMANCE, THE CASE OF THE NIGERIAN BANKING INDUSTRY
Giwa Macnun AdemolaThis study examines the effect of capital structure on the profitability of Deposit Money Banks
(DMBs) in Nigeria between 2014 and 2024 using yearly data. The research specifically
investigates how debt-equity composition influences banks’ financial performance, measured
through return on equity (ROE). Employing a Panel Autoregressive Distributed Lag (P-ARDL)
model, the study explores both short-run and long-run relationships between capital structure
components and profitability. The findings reveal a significant long-run relationship between
capital structure and profitability among the selected banks. Specifically, total debt and long-
term debt were found to have negative but significant impacts on profitability, suggesting that
excessive leverage reduces returns. Conversely, equity financing exhibited a positive influence
on profitability, implying that banks with higher equity ratios tend to achieve better financial
stability and performance. The study contributes to existing literature by providing empirical
evidence from the Nigerian banking sector using recent post-reform data, thereby enhancing
understanding of optimal financing strategies in emerging economies. It also offers valuable
insights to policymakers, financial managers, and investors on maintaining a balanced capital
structure to enhance profitability and mitigate financial risks.
Keywords: Capital Structure, Profitability, Panel ARDL, Debt-Equity Ratio, Deposit Money Banks.Notes
This study is highly relevant to the Nigerian banking industry because capital structure decisions directly influence profitability in a volatile environment marked by high interest rates, inflation, and exchange rate instability. The finding that debt—especially long-term borrowing—reduces profitability reflects Nigeria’s high cost of funds and the risks associated with heavy leverage, including higher interest expenses and exposure to currency shocks. In contrast, the positive impact of equity financing supports the Central Bank of Nigeria’s recapitalization drive and Basel III emphasis on strong capital buffers, as equity enhances resilience, improves capital adequacy, and stabilizes earnings. These insights guide bank executives to prioritize equity and retained earnings over costly debt, helping them manage risk and improve financial performance. Investors can also use the findings to identify stronger, less leveraged banks, while policymakers gain evidence supporting stricter leverage controls and capital adequacy requirements. Overall, the study provides practical guidance for improving profitability, strengthening financial stability, and enhancing the long-term sustainability of Nigerian Deposit Money Banks.