THE EFFECT OF CAPITAL STRUCTURE ON PROFITABILITY OF FIRMS IN NIGERIA

ABSTRACT This research investigates the impact of capital structure on the profitability of quoted manufacturing firms in Nigeria over the period 2014-2023. The study employs a mixedmethods approach combining descriptive statistics, correlation analysis, and OLS regression to analyze data collected from annual reports of selected firms. The study outlines the significance of understanding capital structure decisions in enhancing firm profitability amidst the dynamic economic environment of Nigeria. The theoretical framework, based on Modigliani and Miller's capital structure theory and the pecking order theory by Myers, provides a foundation for examining how financing choices influence firm value and performance. The review of relevant literature on capital structure determinants, profitability metrics, and previous studies in the context of manufacturing firms, offers insights into global and Nigerian perspectives. The research methodology, outlining the data collection process, sample selection criteria, and analytical techniques employed. The study focuses on profitability proxies (ROA, ROE, NPM), capital structure proxies (DER, DR, ER ICR), and determinants (IC, FS, IC, MC, RE, and tax) to examine their interrelationships and effects on firm profitability. Descriptive statistics summarized the characteristics of profitability and capital structure variables. Findings indicate moderate profitability metrics with significant variability across firms. Correlation analysis reveals positive relationships between profitability (DPA) and capital structure proxies (DER, DR, ER), with size, market conditions, and regulatory environment also influencing profitability outcomes. OLS regression further validates these relationships, highlighting significant impacts of leverage ratios and moderate influences from tax expenses. The implications of the findings, emphasizing the strategic importance of capital structure decisions in enhancing firm profitability. The study confirms that balanced capital structures positively influence profitability, while excessive debt and unfavorable tax management strategies diminish profitability. Insights from this research contribute to the body of knowledge on financial management in emerging economies and provide practical recommendations for policymakers, investors, and corporate managers in optimizing capital structure for sustainable growth and profitability. Overall, this study contributes to both theoretical and practical perspectives on capital structure and firm performance, offering nuanced insights into the complex dynamics of financial decision-making in the Nigerian manufacturing sector.