The Effect of Financial Leverage on the Value of Listed Deposit Money Banks in Nigeria

Abstract

This study seeks to provide evidence on the Effect of Financial Leverage on the Value of Listed Deposit Money Banks in Nigeria. The analysis was conducted on seven (7) out of fifteen (15) Deposit Money Banks listed in the Nigeria Stock Exchange (NSE) for the period of 2006-2015. The major focus of this study is to investigate empirically firm specific variables such as, firm leverage, long term debt/total capital, debts/total assets and debts/equity on the value of seven (7) listed Deposit Money Banks in Nigeria. The study used only secondary data. The data were collected from annual reports and accounts of the sampled banks for the period of study. To achieve the research objectives, ordinary least square (OLS) and generalized least square (GLS), descriptive statistics and correlation method were employed in carrying out the analysis using STATA Version 12.00. The result of the study reveals a positive and significant relationship between total debt/total asset and the firm’ value proxied by Tobin’s Q. The study shows that total debt/total capital has negative and insignificant effect on the firms’ value and at the same time debts/total equity shows negative but significant relationship on the value of Listed Deposit Money Banks in Nigeria. Therefore, it is recommended that management of Listed Deposit Money Banks in Nigeria should increase the use of debts to total assets ratio order to maximize the shareholders’ wealth and reduce total debt to total capital and total debt to total equity ratio as it is dangerous for the firm in the Nigeria banking industry. Moreover, mechanism should be put in place to ensure proper use of financing mix that will offer the prospect of enhancing value for shareholders in the sector.