Capital Structure and Firm Performance: Moderating Role of Firm Size and a study of Deposit Money Banks in Nigeria

Abstract

This study empirically examined the moderating role of firm size in the relationship between capital structure and the performance of deposit money banks (DMBs) in Nigeria, with return on assets and Tobin’s Q serving as performance indicators. Guided by four specific objectives and corresponding hypotheses, the research was anchored on the Pecking Order Theory (POT). The study covered all twelve (12) listed DMBs in Nigeria, which also formed the sample size. Secondary data were obtained from the audited financial statements of these banks for the period 2010–2024. The analysis employed the Panel Autoregressive Distributed Lag model to estimate both short-run and long-run dynamics of the impact of capital structure on bank performance with firm size as a moderating variable. The findings revealed that, when firm size was introduced as a moderator, the effects of equity-to-total-assets and debt-to-total-assets reversed in sign and became significant in the long run under both performance measures (return on assets and Tobin’s Q). In the short run, these effects were insignificant under return on assets but significant under Tobin’s Q. This indicates that firm size significantly influences the relationship between capital structure and DMB performance. The study recommended that bank shareholders should prioritize an optimal capital structure mix that maximizes profitability while taking into account the size of their bank.

Keywords: Capital Structure, Deposit Money Banks, Firm Size and Moderating role.