Capital Structure and Financial Health: Evidence from Deposit Money Banks in Nigeria

Abstract

Financial sector plays a crucial role in the growth and development of the Nigerian economy but a constant focus of regulatory activities has been on the system of capitalization. The relationship between equity and debt ratio has been identified as a common cause of imbalance in the capital structure. The population of the study comprised of the 15 quoted commercial banks. The study employed secondary data obtained from audited financial reports of 15 quoted deposit money banks in Nigeria as rated by Fitch 2017. Data collected from annual reports of quoted commercial banks were analyzed using Fixed Effect, Random Effect, and Panel regression model. Findings revealed that debt-equity ratio (DER) has significant negative impact on financial health of commercial banks in Nigeria at 5% level of significant. Also, debt-asset ratio has significant negative impact on financial health of commercial banks in Nigeria. Based on the findings of this study, the study recommends that financial managers should try to finance their activities from retain earnings rather than relying heavily on debt capital in their capital structure. Financial manager should also make an effort to attain an optimal level of capital structure and endeavor to uphold it as much as possible.