Capital Structure and Firm Performance on Listed Oil and Gas Company in Nigeria
Chapter One
Research Objective
The main objective of this study was to analyze the effect of capital structure on profitability of oil and gas company listed in Nigerian stock exchange. The Specific Research Objectives are:
- To determine the relationship between capital structure and profitability of oil and gas companyin Nigerian
- To determine nature of the relationship between growth and profitability of core business operations of oil and gas company in Nigerian
CHAPTER TWO
LITERATURE REVIEW
THEORETICAL/ CONCEPTUAL FRAMEWORK
This section defined the key concepts of the study and those concepts were capital structure and profitability of a company which were the study variables
Theoretical Framework
This study uses Traditional Model of Capital Structure as its theoretical framework. Under this, the value of the company is affected in the way it is financed. According to this model, change in capital structure directly affects the firm’s market Value. Optimal capital structure exists at the point where weighted average cost of capital is minimized. Under this model the value of the company and its capital structure are related
Under traditional model of capital structure, there are two main assumptions described, the first assumption is that all earnings are distributed as dividends that mean no retention by the company and the second assumption is that firm’s earnings are expected to remain constant throughout.
According to Frentzel (2013) with his study on capital structure theory since Modigliani and Miller, stated that “the traditional view of capital structure assume that there is a specific optimal gearing level that eventually minimizes the cost of capital and maximizes the value of the firm and shareholders wealth”
Conceptual Framework of the study
Ross (2003) states that a corporation can raise money (cash) from lenders or from shareholders. If it borrows, the lenders contribute the cash, and the corporation promises to pay back the debt plus a fixed rate of interest. If the shareholders put up the cash, they get no fixed return, but they hold shares of stock and therefore get a fraction of future profits and cash flow. The shareholders are equity investors, who contribute equity financing. The choice between debt and equity financing is called the capital structure decision. Capital refers to the firm’s sources of long-term financing.
Corporations raise equity financing in two ways. First, they can issue new shares of stock. The investors who buy the new shares put up cash in exchange for a fraction of the corporation’s future cash flow and profits. Second, the corporation can take the cash flow generated by its existing assets and reinvest the cash in new assets. In this case the corporation is reinvesting on behalf of existing stockholders. No new shares are issued.
What happens when a corporation does not reinvest all of the cash flow generated by its existing assets? It may hold the cash in reserve for future investment, or it may pay the cash back to its shareholders.
Business is inherently risky. The financial manager needs to identify the risks and make sure they are managed properly. For example, debt has its advantages, but too much debt can land the company in bankruptcy (Brealey, Myers, & Allen, 2011)
Financing arrangements determine how the value of the firm is sliced up. The firm can determine its capital structure. That is, the firm might initially have raised the cash to invest in its assets by issuing more debt than equity; now it can consider changing that mix by issuing more equity and using the proceeds to buy back some of its debt. Financing decisions like this can be made independently of the original investment decisions. The decisions to issue debt and equity affect how the pie is sliced (Ross, 2003).
A number of theories have been advanced in explaining the capital structure and profitability / value of firms. The existing theories of capital structures and profitability/ firm value are explained as follows.
CHAPTER THREE
METHODS OF STUDY
Research Design
This study used quantitative approach because this study used quantitative data to analyze the relationship between dependent variable (company profitability) and independent variable (company capital structure).
This study used deductive approach where capital structure theory that describes the relationship between capital structure and company profitability was used to develop a proposition. In order to carry out the research assignment, quantitative data were used for descriptive research design which aimed at testing associations of relationships. The researcher used secondary data from annual published financial statements for companies under the study.
Population of study
The survey population of this study was all listed in oil and gas companies in Nigerian stock exchange. A researcher selected companies listed in Nigerian stock exchange as a survey population due to the challenge of getting data from unlisted companies. The study sample was purposefully selected three oil and gas company within five years of operation with 15 observations as a panel data, which means three companies for the period of five years, were targeted by a researcher.
Sample and Sampling technique
Sampling technique of this study was non probability sampling, because the study data used was secondary data which was purposive and quantitative. Non probability Sampling was used because a researcher selected a particular unit of the universe for forming a sample. The companies used are Chevron Corporation, Shell Nigeria and Exxon Mobil Corporation (XOM) as a sample of the study which created 15 observations making the study sample valid.
CHAPTER FOUR
DATA PRESENTATION, RESULT AND DISCUSSION OF FINDINGS
Presentation of data
Table 4.1: Descriptive Statistics
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
summary
This study used panel data of 3 oil and gas company for the period of 5 years creating 15 observations of the data. Researcher analyzed the relationship between capital structure variables (independent variables) against profitability variables (dependent variable). Fixed effect regression method was used to measure the relationship between capital structure and return on asset (ROA) while random effect regression model used to test the relationship between capital structure and return on equity of oil and gas company (ROE). Moreover, partial correlation technique also used to measure the relationship between the study variables in order to support the regression results.
After testing the relationship, researcher revealed the mixed results between capital structure variables and company profitability that means some capital structure variables indicated a negative relationship with company profitability variables while other capital structure variables indicated a positive relationship with profitability variables. Long term debt ratios and short term debt ratios were used as capital structure indicators of oil and gas company. The random effect regression results indicated a negative relationship between Long term debts to equity (LD/EQ) against return on equity (ROE) at a coefficient of -5.2153 which was also supported by partial correlation results at -0.1581. In terms of short term debt to equity (SD/EQ) against return on equity (ROE), random effect regression results also indicated a negative relationship at -7.7736 which was supported by partial correlations results at -0.2153.Both long term debt and short term debt to equity indicated a negative relationship with return on equity, that means there is no relationship between capital structure and company profitability in terms of return on equity.
Fixed effect regression results indicated a positive relationship between short term debt to assets and return on asset at 0.1683 coefficient level .These results were supported by partial correlation results .Except negative results indicated between long term to equity and short term to equity against return on assets. The positive relation between the variables is consistent with the trade of theory and other previous empirical studies by Abiodum (2012) in Ukraine, and Soyebo (2014) in Nigerian firms. The negative relationship between the variables is consistent with Leon (2016) who used to study manufacturing firms in Sri- Lanka, Tailab (2014) who tested the relationship in American companies, and Lavorskyi (2016) in Ukraine.
Conclusion
The study revealed that, capital structure of listed oil and gas company in Nigeria affect company profitability in terms of return on assets positively. On the other side, capital structure of listed oil and gas company has negative relationship with company profit in terms of shareholders fund or return on equity. The results indicate that debt usage has more advantage for companies that depend much on assets to generate profit than those that depend much on equity or shareholders fund to generated company profit
Recommendations
To improve the performance of oil and gas company in Nigeria, the following recommendations have to be observed. The company management of listed oil and gas company should increase the use more short term debt to asset ratios because they have much influence on company profitability in terms of both return on equity and return on assets if compared with other capital structure ratios.
Moreover, investors of listed oil and gas company in Nigeria should review the capital structure of companies before investing in them because the strength of a company capital mix determines the level of returns. More companies in Nigeria should put their financial information through Nigerian stock exchange in order to allow investors to review their capital structure and attracts more investors in their companies
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