Assessment of the Impact of Capital Structure on the Performance of Deposit Money Banks in Nigeria

Abstract

This study investigates the impact of capital structure on the financial performance of deposit money banks (DMBs) in Nigeria over the period 2013–2023. The research adopts an ex-post facto design using secondary data sourced from the annual financial statements of five selected banks listed on the Nigerian Stock Exchange. Capital structure is proxied by short-term debt to total assets, long-term debt to total assets, and total debt to equity ratios, while bank performance is measured through return on assets (ROA). The study applies panel data estimation techniques, including fixed and random effects models, alongside diagnostic tests such as heteroscedasticity, multicollinearity, and Hausman tests to ensure robustness. The fixed effects regression results reveal that short-term and long-term debt ratios exhibit positive but statistically insignificant effects on bank performance, whereas total debt to equity ratio and firm size (log of total assets) have positive and significant influences. These findings imply that while leverage contributes to profitability, its effect is sensitive to the composition and maturity of debt instruments. The study concludes that optimal capital structure decisions are essential for improving bank performance and stability within Nigeria’s competitive financial environment. It recommends that bank management strengthen their financing strategies by maintaining balanced short- and long-term debt positions and leveraging tax advantages of debt financing to enhance shareholder value and sustain profitability.