Effect of Leverage on Firm Performance in Nigeria: A Case of Listed Chemicals and Paints Firms in Nigeria

Abstract

This paper assesses relationship between leverage and Return on Assets of Chemicals and Paints firms quoted on the floor of Nigerian Stock Exchange using a sample of three firms randomly chosen from a total of nine firms listed in the sector for a period of ten years, 2000 – 2009. Our sample size represent one-third of the population of the study which is considered enough to generalize the findings on the sector for the period in question. Ordinary Least Square (OLS) was used as a method of estimation for the data sourced secondarily from the NSE factbook covering the period of the study of the selected firms. Return on Assets (ROA) was used as measure of performance while Equity (EQT) and Debt Ratio (DR) as proxies for capital structure in models 1 and 2 respectively. The results showed that EQT finance has a significant and positive impact on ROA but DR has a negative and insignificant relationship on the performance measure. It was therefore recommended that firms in the sector should be more of equity financed than debt by sourcing more of equity in their finance ratio and avoiding too much debts. This findings of this study is consistent with most of the empirical studies and provide evidence in support of Agency Cost Theory.