Author(s) :

Ezuma Smart Chinedu, Ph.D,, Okoye, Peter Anija,.

Volume/Issue :

Abstract :

This study assesses the moderating effect of firm size on the relationship between capital structure and financial performance among listed firms in Nigeria over a ten-year period (2014–2024). An ex post facto research design was adopted, utilizing secondary data extracted from audited annual reports of firms listed on the Nigerian Exchange Group (NGX), the NGX Factbook, and the Central Bank of Nigeria (CBN) Statistical Bulletin. The study employed panel regression and moderation analysis techniques within the frameworks of the trade-off and pecking order theories to examine how firm size influences the leverage–performance relationship across major sectors of the Nigerian economy. Financial performance was measured using three key indicators Return on Assets (ROA), calculated as Net Income divided by Total Assets; Return on Equity (ROE), computed as Net Income divided by Shareholders’ Equity; and Tobin’s Q, determined as (Market Value of Equity plus Book Value of Debt) divided by Total Assets. Capital structure was measured through the Debt Ratio (Total Debt ÷ Total Assets), Debt-to-Equity Ratio (Total Debt ÷ Total Equity), and Long-Term Debt Ratio (Long-Term Debt ÷ Total Assets). Firm size, the moderating variable, was proxied by the natural logarithm of total assets (LnTA) to capture scale effects. The regression model incorporated an interaction term between capital structure and firm size to test for moderation. Results from the panel regression revealed that firm size significantly moderates the relationship between capital structure and financial performance (β = 0.412, p < 0.05). Specifically, larger firms exhibited a stronger and more positive leverage performance relationship, implying that firm size enhances the capacity to manage debt efficiently and convert leverage into improved profitability. In contrast, smaller firms showed a weaker and often negative interaction, reflecting limited access to capital markets, higher borrowing costs, and increased exposure to financial distress. These findings support the trade-off theory, which posits that larger firms benefit from economies of scale, lower bankruptcy risks, and more favorable financing terms when leveraging debt. The results also align with the pecking order theory, suggesting that smaller firms’ limited internal financing capacity compels them to depend more heavily on costlier external financing sources. The study contributes to corporate finance scholarship by extending empirical understanding of firm-specific moderating variables in emerging markets. It offers practical insights for optimizing capital structure decisions through firm size considerations. The research recommends that policymakers, financial managers, and investors incorporate firm size effects into capital structure models to enhance financial sustainability, competitive positioning, and long-term value creation within Nigeria’s dynamic economic landscape.

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