ABSTRACT

This research seeks to examine the Effect Of Capital Structure On Corporate Performances of Deposit Money Banks in Nigeria. The study spanned from 2000-2016 which is Seventeen years study. The independent variables used for the study are Bonds, Preference Shares, Ordinary shares and Debenture while the dependent variable is the aggregate Profit after Tax of all Deposit Money Banks in Nigeria. Time series data used were sourced from CBN Statistical Bulletin 2016. The study applied E-view 7.0 version and the estimation technique applied are Ordinary Least Square (OLS), Diagnostic Test, Serial Correlation Test, Stability Test, Granger Causality and Johansen Co-integration Test. The result revealed that the whole independent variables have 99% positive impact to Profit After Tax of Deposit Money Banks in Nigeria, more so (Adjusted R2) is 0.98 which suggest that 98% of the independent variables could be explained by the changes in the dependent variable and the remaining 2% could not be explained due to some error in the financial system. The Durbin Watson test is 2.155, which revealed no presence of Serial Correlation and it is moderate for prediction. The p-value of the F-stat is 0.000 < 0.05. We reject H0 and conclude that Capital Structure have significant impact on the Performance of Deposit Money Banks in Nigeria. The study recommended that management of Nigerian banks’ should

consider the use of more debt in their capital structure mix as this will reduce the overall cost of

capital as a result of its tax advantage. Moreover to increase bank financial performance, also management should ensure they continue to improve the level of Preference Shares, ordinary shares and debenture in order to mitigate against future financial liquidation. The study contributed to knowledge by providing empirical evidence which will assist management of firms in making sound decision on Capital Structure and adjusting or balancing debt to equity ratio to maintain the optimal level. Also the good understanding of the Impact of Capital Structure individually will enhance sound capital structure decisions which will enhance the performance of Deposit Money Banks in Nigeria.

CHAPTER ONE: INTRODUCTION

212 CBN Interventions in the Real Sector of the Economy 11

CHAPTER THREE: RESEARCH METHODOLOGY

31 Introduction 55

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

51 Summary of Findings 69

List of Figures

Figure 215a: The Circular Flow of Capital Structure and Performance of Deposit

Money Banks (DMBS) 23

CHAPTER ONE

INTRODUCTION

11 Background to the study

Capital Structure decision can be regarded as the combination of debt and equity that a bank uses to finance its business (Damodaran, 2013), its importance is that it is tightly related to the ability of banks to fulfil the goals of various stakeholders Since the famous proposition of Modigliani and Miller (2012) that, in perfect capital markets, capital structure choice is irrelevant to firm value, considerable research has been undertaken to identify the nature of market frictions likely to affect firm value However, such research is typically restricted to non-banks However, when firms make their financing decisions to obtain the optimal capital structure, they consider the benefits of tax advantages and incentives versus the cost of default Thus the main arguments for using debt to finance company activities rely on its relative cost Moreover, issuing debt involves lower administrative costs as it does not necessarily require an underwriter (Pike and Neale,

2014) Kester (2015) differentiated between capital structure and financial structure by affirming that the various means used to raise funds represent the firm’s financial structure, while the capital structure represents the proportionate relationship between long-term debt and equity capital Therefore, a bank’s capital structure simply refers to the combination of long-term debt and equity financing

The theory of capital structure is an important reference theory and perhaps, one of the most puzzling issues in corporate finance The determination of optimal capital structure which maximizes firm’s value has frustrated theoretician for decades (Omojefe, 2014) The early works made numerous assumptions in other to simplify the problem and assumed that both the cost of

debt and cost of equity were independent of capital structure and that the relevant figure for consideration was the net income of the firm (Osaze, 2015) However a closer looks suggests that the cost of debt and the cost of equity are important and relevant figure for consideration Capital structure has been a major issue in financing economic transactions ever since Modigliani and Miller stated in 1958 that given frictionless markets, homogeneous expectations; capital structure decision of the firm is irrelevant By relaxing the assumptions and analysing their effects, theories seeks to determine whether optimal capital structures exist or not The relationship between capital structure and firms value has been extensively investigated in the past few decades (Stohs and Maver, 2014)

However, whether or not an optimal capital structure exists in relation to firm value, is one of the most important and complex issues in corporate finance

The corporate sector in the country is characterized by a large number of firms operating in a largely deregulated and increasingly competitive environmentSince1987; financial liberalization resulting from the Structural Adjustment Program changed the operating environment of firms (Ozkan, 2016) The macroeconomic environment has not been conducive for business while both monetary and fiscal policies of government have not been stable Following the Structural Adjustment Program, lending rate rose to a high side from 15 percent in 1980 to a peak of 298 percent in 1992; but it declined to 169 percent in 2006(Oladeji&Olokoye, 2014) The high interest rate implies that costs of borrowing went up in organized financial market, thus increased the cost of operations The Structural Adjustment Program (SAP) came with its conditions, policies that liberalized and opened up the Nigerian economy to the outside world even when the nation’s domestic produce cannot stand in equal comparison to international commodities, causing unfavourable balance of payment as domestic demand for foreign goods increased also led to the high volatility of the exchange rate system thereby rendering business in

Nigeria uncompetitive, especially given high cost of borrowing and massive depreciation of

Naira, which culminated to increasing rate of Inflation in Nigeria (Patrick, Joseph &Kemi,

2013)

12 Statement of the problem

There are paucity of studies generally on the platform of this topic which has effect on the performance of most corporate bodies even in well-developed economiesand other growing economies and in Nigeria in particular In much anticipation of the researcher, there is little literature yet on this topic, the impact of Capital Structure and effects on corporate performance in Nigeria context Rather, there are related topics on Determinants of Capital Structure and others like Capital Structure and Firm Performance Thisis one- challenging issue that is facing the bank’s choice of Capital Structure mix since the bank has the choice between debt and equityfinancing, the issue of what is the best ratio has been an issue of debate for several years but that has remained still unsettled in area of corporate finance (Nwankwo, 2014)

The studies on the Impact of Capital Structure on performance of Deposit money banks are still scanty in the context of developed and developing economies The few studies available in Capital Structure have not investigated the impact of Capital Structure on Performance of Deposit Money Banks but rather have their focus on the decomposed Capital Structure into short term and long term with their summation into total debt This study aims at contributing in filling this gap by expanding the scope both in period covered and the number of banks included in the data set Since banks has the choice of using debt or equity financing, there is need to explore the effect of this mix on corporate performance OladejiandOlokoye (2014) stated that the choice of Deposit Money Banks deciding on the financing mix in financing for assets and operations through balancing of debt and equity is a serious financing decision There is great need to

investigate how the determinants of Bank’s financing mix affect the corporate performance of

Deposit Money Banks in Nigeria

13 Research Questions

This study has deliberated on the issues affecting capital structures and deposit money banks which has further led to the following research questions to be asked below;

1 What is the effect of Bonds on Profit after Tax of Deposit Money Banks in Nigeria?

2 Does Preference Shares have any impact on the Profit After Tax of Deposit Money Banks in Nigeria?

3 How does Ordinary Share affect Profit after Tax of Deposit Money Banks in Nigeria?

4 To what extent does Debenture affect Profit after Tax of Deposit Money Banks in Nigeria?

14 Objective of the study

The main objective of the study is to ascertain the Impact of Capital Structure on the

Performance of Deposit Money Banks in Nigeria The specific objectives are:

1 To determine if Bonds have effect on Profit after Tax (PAT) of Deposit Money Banks in

Nigeria

2 To establish if Preference Shares have impact on Profit after Tax (PAT) of Deposit Money

Banks in Nigeria

3 To ascertain if Ordinary Shares have impact on Profit after Tax (PAT) of Deposit Money

Banks in Nigeria

4 To establish if Debenture have effect on Profit after Tax (PAT) of Deposit Money Banks in Nigeria

15 Research Hypotheses

The following hypotheses are formulated from the research questions and objectives in answeringthe major aim of the study and are stated as thus:

Ho1: Bonds do not have effect on Profit after Tax (PAT) of Deposit Money Banks in Nigeria

Ho2: Preference Shares do not have impact on Profit after Tax (PAT) of Deposit Money Banks in

Nigeria

Ho3: Ordinary Shares do not have impact onProfit after Tax (PAT) of Deposit Money Banks in

Nigeria

Ho4: Debenture do not effect on Profit after Tax (PAT) of Deposit Money Banks in Nigeria

16 Scope of the study

The location of the research is targeted at the Nigerian economy when most of the statement of problem, research questions, hypotheses and objectives is centered upon This study focuses on the Effect Of Capital Structure On Corporate Performances of Deposit Money Banks in Nigeria within the period 2000-2016, which is seventeen years of a time series frame in which a secondary data typical method will be used as a means for sourcing data For the purpose of this study, all quoted Deposit Money Banks in Nigeria were used These include: First Bank of Nigeria, Zenith Bank, Guaranty Trust Bank, Fidelity Bank, Access Bank, Diamond Bank, Eco Bank, United Bank for Africa, Skye Bank,Stanbic IBTC Bank, First City Monument Bank, Union Bank of Nigeria, Citi Bank, Heritage Bank, Keystone Bank,Standard Chartered Bank, Sterling Bank, Unity Bank and Wema BankAll the banks used are located in Lagos State, Nigeria The data employed for the study will be generated from the financial statements of the stated banks and CBN Statistical bulletin 2016

17 Significance of the study

There is no single corporate which can finance its activities with the use of equity alone However, many companies who are ignorant or have little knowledge of the numerous benefits of debt financing tend to be self-sufficient by using equity or minimizing as much as possible the amount of debt in their capital structure To some organizations, a Capital Structure is merely a theoretical concept and therefore does not demand or worth formal planning and to some others, its mix does not matter as long as the company makes profit or is profitable overtime This investigation would change all of that

The outcome of this research builds on previous works of researchers on the tax shield benefits of debts financing and its effect on the earning per share and share price Also, its contribution to the field of research on Capital Structure in Nigeria Petroleum Companies is immense as it clarifies the ambiguity in the use of EPS as a measure of performance

The following persons will benefit greatly from this research investigation:

i Management: it is be of immense benefit to management of Deposit Money Banks as it points out the desirability of both debt and equity financing at various economic situations Management is responsible for making investigation and financial decisions in an organization Therefore the knowledge of these findings will better equip them to make better decision

ii General Public: The stakeholders of any organisation comes from the public and the operation of Deposit Money Banks have direct effect on members of the public especially those intending to invest in banking sector, hence the need for them to be aware of the capital structure decision making

iii Business practitioners and investors: This group comprises of the equity investors, bondholders and all other persons who invested in the Various Deposit Money Banks They need to understand the effect of their decision

iv Students and researchers: This research further contributes to the on-going debate on the issue of capital structure

Finally, the research is valuable and useful to students and researchers in the field of finance In all, its importance cannot be overemphasized but sufficient to say these few

18 Limitations of the study

This study was supposed to cover all variables used as indicators of the Capital Structureand Performance of Deposit Money Banks in Nigeria as in regards to collection of adequate data on the interactive effect and relationship of the different variables between Capital Structure and Deposit Money Banks The intended scope cannot, however, be attained due to the fact that some variables do not have sufficient data that could make significant impact, more also, the research topic limited its scope to the Performance of Deposit Money Bankswhich is only within banking sector in the Nigerian economy The objectives were centred in between the capital structure of Deposit Money Bank and the variables used in capturing the Capital Structuresare limited to the Capital Structures indicators being used by the Deposit Money Banks in the Nigerian Stock Exchange (NSE) These variables are Bonds, Ordinary shares, Debenture and Preference shares held by each of these Deposit Money Banks Also, to value the performance of these deposit money banks the Profit after Tax is limited in measuring the growth of these deposit money banks Although, there are lots of variables to be used in capturing these two sections but for the course of this study, it will concentrate on these variables for just a period of seventeen years

19 Definition of terms

The following are the major terms used in the course of this study and are defined as thus;

Bond: It is seen as long term fund of capital structure in which banks offer to the public as an avenue of generating capital for such banks that needs to expand their business activities

Capital structure: A mix of debt, preferred stock, and common stock with which the firm plans to finance its investments

Debenture: It is a type of debt instrument that is not secured by physical assets or collateral Debt:They are regarded as firms’ borrowings in which it is divided into short and long term debts that are also part of the capital structure of companies

Equity: It refers to the contributed capital; money originally invested in the business in exchange for shares of stock

Ordinary Shares: This is a type of fund that is part of the capital structure of a firm in which it is financed out-source through the sales of the firm’s equity right to private individuals or public PreferenceShares: More commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first Most preference shares have a fixed dividend, while common stocks generally do not Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do

Profit after Tax (PAT): The gain after deducting all expenses from the total sales made by firms is called the profit and after tax rate value has also been deducted from the profit; it is then called profit after tax which measures the performance of firms