EFFECT OF FINANCIAL LEVERAGE ON PERFORMANCE OF LISTED INDUSTRIAL GOODS FIRMS IN NIGERIA

Abstract

This study examines the effect of financial leverage on the performance of listed industrial firms in Nigeria
from 2014 to 2023, utilizing an ex-post facto research design. The research focuses on analyzing how
different forms of financial leverage short-term debt, long-term debt, and the debt-equity ratio affect firm
performance, as measured by Return on Equity (ROE) and Tobin's Q. The study employs regression
analysis to assess the impact of leverage on performance, providing empirical evidence that highlights
significant relationships between leverage types and performance metrics. The findings reveal that while
the debt-equity ratio has a positive effect on performance, both short-term and long-term debts are
negatively associated with performance. The research contributes to the understanding of financial
leverage within the context of Nigerian industrial firms, offering practical insights for financial managers
and policy implications for regulators. The study therefore recommends that firms maintain an optimal
debt-equity ratio that maximizes profitability while minimizing risks associated with excessive leverage.
This involves regularly assessing debt levels relative to the firm’s cash flow capabilities, investment
opportunities, and prevailing market conditions. Firms should consider leverage as a strategic tool to
finance growth opportunities and enhance returns on investment. However, they must exercise caution to
avoid over-leveraging, especially during economic downturns or in high-interest rate environments,
where the cost of debt servicing may outweigh the benefits