THE IMPACT OF CAPITAL STRUCTURE AND PERFORMANCE ON THE PETROLEUM SECTOR

THE IMPACT OF CAPITAL STRUCTURE AND PERFORMANCE ON THE PETROLEUM SECTOR

ABSTRACT

The purpose of this paper is to empirically investigate the effect which capital structure choice has on performance of petroleum companies in Nigeria as one of the energy or transition economies. I investigated the relationship between return on equity (ROE), return on assets (ROA), and the earnings per share (EPS) and the capital structure for a sample of 4 petroleum companies from the Nigeria Stock Exchange from 2003 to 2012. Secondary data were used for the study. The data were gotten from the Nigeria Stock Exchange fact books issued for the various years under study. I used the linear regression analysis (SPSS 21) in estimating the relationship between leverage and performance. Using two accounting measure of performance (return on equity, ROE and return on assets, ROA), the results reveal that capital structure choice in general has a weak and insignificant effect on petroleum companies performance. I therefore, recommended that; Petroleum companies should use debt to finance part of their investment if capital can be obtained at a cost lower than the return on such investment in order to improve the value, Petroleum companies should plan their capital structure and employ less debt to finance their investment because of its negative effect on performance as evidence in the results of the second hypothesis, Petroleum companies should take critical look at the other factors which enhances performance, value and profitability, Debt should be used to enhance and improve the returns to shareholders.

CHAPTER ONE

1.1      BACKGROUND OF THE STUDY
The theory of capital structure is an important reference theory and perhaps, one of the most puzzling issues in corporate finance. The determination of optimal capital structure which maximizes firm’s value has frustrated theoretician for decades. The early works made numerous assumptions in other to simplify the problem and assumed that both the cost of debt and cost of equity were independent of capital structure and that the relevant figure for consideration was the net income of the firm. However a closer look suggests that the costs of debt and the cost of equity are important and relevant figure for consideration.
Pandey (1999) defines capital structure to mean a mix of long term sources of funds, such as debentures long term debt, preference share capital, and equity share capital including reserves and surplus (i.e. retained earnings). Pandey goes further to say that some companies do not plan their capital structure and it develops as a result of the financial decision taken by the financial manager, but ultimately, they may face considerable difficulties in raising funds to finance their activities.

THE IMPACT OF CAPITAL STRUCTURE AND PERFORMANCE ON THE PETROLEUM SECTOR