Capital Structure and the Profitability-Liquidity Trade-off

International Journal of Economics and Financial Issues, 2019, 9(3), 105-115

11 Pages Posted: 10 Jan 2020

See all articles by Osaretin Kayode Omoregie

Osaretin Kayode Omoregie

Lagos Business School

Sodik Adejonwo Olofin

affiliation not provided to SSRN

Fredrick Ikpesu

Pan-Atlantic University - Lagos Business School

Date Written: April 5, 2019

Abstract

Theoretical guidance suggests a trade-off between profitability and liquidity in effect of capital structure decisions. This study investigates the link between capital structure and profitability-liquidity trade-off using descriptive and Panel-VAR analysis for 18 listed manufacturing companies in Nigeria. Findings from this study show no evidences of profitability-liquidity trade-off as function of capital structure. However, this study found that profitability and liquidity responds similarly to capital structure. Relative to equity share, debt ratios have negative effect on profitability and liquidity. Relative to asset, debt has positive effect on profitability and liquidity. Evidences further suggest that the way profitability and liquidity respond to capital structure is reliant on the business cycle position of the economy. Finance managers are advised to keep abreast the economic trend in the decision to adopt debt financing.

Keywords: Capital Structure, Profitability-Liquidity Trade-off, Panel-VAR

JEL Classification: G00, G32, M21

Suggested Citation

Omoregie, Osaretin Kayode and Olofin, Sodik Adejonwo and Ikpesu, Fredrick, Capital Structure and the Profitability-Liquidity Trade-off (April 5, 2019). International Journal of Economics and Financial Issues, 2019, 9(3), 105-115, Available at SSRN: https://ssrn.com/abstract=3506624

Osaretin Kayode Omoregie (Contact Author)

Lagos Business School ( email )

Km 22 Lekki Epe Expressway
Ajah
Lagos
Nigeria
105102 (Fax)

Sodik Adejonwo Olofin

affiliation not provided to SSRN

Fredrick Ikpesu

Pan-Atlantic University - Lagos Business School

Km 22 Lekki Epe Expressway
Ajah
Lagos
Nigeria

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