Capital Mix and Performance of Firms Relations: A Panel Generalized Methods Moment Evidence from Nigeria

This study is in furtherance to disagreement among financial experts on the issue of what should
makeup of the capital structure of a firm and its relationship with the performance of the firm. The
study employed Panel generalised method moments to examine the data obtained from annual
reports and accounts of twenty-four quoted firms of the ten sectors in Nigeria. After the empirical
examination, Kao cointegration found that long run relationship exists between market value and
capital structure. The result of J-statistic validated the process suitable to adduce the
contemporaneous relationship between performance of firms and capital mix. The result of analysis
showed that both equity capital and debt capital have positive and significant relationship with
performance of firms in Nigeria. These results contradict the assertions propositions of Modigliani and
Miller (1958), that the firm’s value is not affected by the Capital Structure; firm should have the same
market value and the same weighted average cost of capital at all capital structure levels, since the
value of a company should depend on the return and risks of its operation and not on the way it
finances its operations. This study corroborates the propositions of net income theory and the
traditionalists’ view which support the relevance of capital structure in determining the firm’s value.
Arellano-Bond Serial Correlation Test found no presence of Serial Correlation. In the light of the
outcome of this study, firms should have a mix of both debt and equity in their financing structure in
order to enhance the market value of the firm. It should be done in an optimal way so as to achieve
the desired objective of increase in market value of the firm.