A Threshold Analysis of the Short-Term Capital Structure and Firm Performance Nexus in Nigeria

Abstract

The focus of the research is to examine the relationship between short term capital structure and firm performance and to identify the presence of a safe short term debt-equity threshold in this regard. Consequently, the study utilized the Panel threshold regression estimation technique using complete data from listed manufacturing firms in the Nigerian Stock Exchange for 2018-2022. The data analytics used for the study includes descriptive statistics, the correlation analysis and finally, the threshold regression. Our results identified the presence of a threshold effect for the effect of short term debt to equity ratio (STDEQTY) on ROA indicator of financial performance but not for TOBINQ. In the threshold, where STDEQTY threshold ≥ 3.45%, the coefficient (λ1) is -28.73 and thus the result suggests that points beyond this level may be most risky and should be avoided. In this regard, it is important to for manufacturing firms to adjust their STDEQTY ratios much lower than the identified threshold to move from the region of negative returns on assets. Furthermore, the study identified the presence of a threshold effect for the effect of TDEQTY on ROA indicator of financial performance but not for TOBINQ. The study concludes that manufacturing firms in Nigeria indeed engage considerable debt obligations for their operations and have a high appetite for debt financing. However, while this ordinary makes the firms less debt averse, it is recommended that managers reduce the extent of their debt obligations. In addition, the efficiency, under-development and high market imperfections has not made it easy for firms to seek equity financing and hence the strong reliance on debt. Hence, Regulatory Authorities need to focus on implementing policies to improve the efficiency of the equity markets.