ABSTRACT
The study examined the impact of capital structure on the profitability of selected quoted insurance companies in Nigeria between 2013 and 2017. The data were obtained from the published financial reports of selected firms. The panel data analysis was employed in the study. The findings showed that: Total debt ratio (β= 0.07; p>0.05) and debt-to-equity ratio (β= 0.01; p>0.05) had insignificant positive impact on return on asset of selected quoted insurance firms in Nigeria; The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on return on asset of selected quoted insurance firms in Nigeria (F=2.65; p>0.05); Total debt ratio (β= 0.14; p>0.05) and debt-to-equity ratio (β= 0.08; p>0.05) had insignificant positive impact on return on equity of selected quoted insurance firms in Nigeria; The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on return on equity of selected quoted insurance firms in Nigeria (F= 1.95; p>0.05); Total debt ratio (β=0.08; p>0.05) had insignificant positive impact on net profit margin while debt to equity ratio (β=0.04; p<0.05) had significant positive impact on the net profit margin of selected quoted insurance firms in Nigeria;The combined effect of total debt ratio and debt-to-equity ratio is statistically insignificant on net profit margin of selected quoted insurance firms in Nigeria (F= 3.55; p<0.05). The study concludes that capital structure in the form of debt financing and equity financing contributes to the profitability of selected quoted insurance firms in Nigeria, but its influence on profitability is negligible. The study suggest that; Insurance companies should introduce more debt, especially long-term debt, into their capital structure mix as this will have an automatic effect of reducing the overall cost of capital as a result of its tax advantage that accrue to the organization when this decision is taken, and this often could lead to enhanced profitability of the organizations.
CHAPTER ONE
INTRODUCTION
1.0 Background of Study
The success of insurance companies in Nigeria business environment depends on the ability of the managers to effectively determine the optimal capital mix which is necessary to ensure that they make profit and shareholders get to see that objective fulfilled which is wealth maximization, capital structure decision is very crucial to any organization; it is very difficult to decide the best combination of debt and equity. Capital structure reflects the firms financing strategy. Therefore the optimal capital structure is said to exist when the debt and equity can be combined to reduce the cost of capital and enhance the firms’ profitability (Mohammed & Khalifa, 2014). Modigliani and Miller (1958) demonstrated the irrelevance of capital structure in firm value, although the assumption is valuable only in perfect market conditions, where all investors have free access to market information, there are zero transaction costs and no tax difference between dividends and capital gains.
However, real economies are far from perfect and thus many financing decisions theories were developed over time in order to demonstrate the purpose of capital mix and its role in company value. (Sorana, 2015) Capital structure is the way in which a firm finances its operation which can either be through debt or equity or the combination of both (Brigham, 2004). A number of theories explained the relationship between profitability and value of firm. It has been argued that firms with high growth rate have high debt to equity ratio and it has been observed that bankruptcy has an effect on capital structure (Zeituna & Tian, 2007). According to (Kochhar, 1997), poor capital structure may lead to a possible reduction or loss in the value derived from strategic assets. Hence, the capability of a firm in managing its financial policies is important if the firm is to realise gain from it specialised resources (Olokoyo, 2013). The raising of appropriate funds in an organization will aid the firm in its operation. Hence, it is important for firms in Nigeria to know the debt equity mix that gives effective performance after a good analysis of business operation and obligation (Olokoyo, 2013).
The cost of capital is having greater influence on the Earnings before interest and tax level of the firm, which will directly affect the amount of earning available to the investor that finally reflects on the value of the firm. If the manager of an organization decide not to maintain the capital structure of the firm it will affect the firm growth and profitability which will later have financial distress on the profitability of the firm. Firms can also issue dozens of distinct securities in a countless combination to maxima overall market value (Abor, 2005). Profit has relevance in comparing the efficiency of a business organization. Profitability is the ability of a lucrative activity to generate revenue higher than expenses involved. The profitability measures are known as profitability ratios or accumulated margin (Stefeap, 2008). Profitability means ability to make profit from all business activities of an organization. Profitability is the ability of a given investment to earn a return from its use (Tulsian, 2014). (Erasmus, 2008) noted that financial performance measure like profitability and liquidity among others provide available tools to shareholders to evaluate past financial performance and current position of a company. Profitability is a primary goal of all business a business that does not make profit cannot survive. The ratios used to measure profitability are Return on Capital Employed (ROCE)
