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Australian Finance & Banking Review 

Vol. 1, No. 1; 2017 

Published by Centre for Research on Islamic Banking & Finance and Business 

 

26 
 

 

Prime Equity, Leveraged Structure and Corporate Earnings in 

Nigeria: A Comparative Analysis 
 

Lucky Anyike Lucky1 

Akobundu Charles Echewodo2 

 

 

1Department of Banking and Finance, Rivers State University, Nigeria 
2Department of Finance and Banking, University of Port-Harcourt, Nigeria  

Correspondence: Lucky Anyike Lucky,Department of Banking and Finance, Rivers State University, Nkpolu 

Orowurokwo, Port Harcourt, Rivers State, Nigeria.Email: lucky.anyike@yahoo.com 

 

 

Received: October 04, 2017     Accepted: October 09, 2017      Online Published: October 14, 2017 

 

Abstract 

This study examined prime equity, leveraged structure and corporate earnings in Nigeria. The objective was to 

examine if equity value and debt equity ratio have relationship with earnings per share of quoted deposit money 

banks. Earnings per share were modeled as the function of equity value and debt equity ratio. After cross 

examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed 

effect model. The study found that 74.2% and 66.7% variation on earnings per share can be traced to equity 

value. The β coefficient indicates that of equity value has positive impact on earnings per share, while Debt 

equity ratio on of deposit money banks can explain 68.9% and 59.9% variation. The β coefficient proves that 

debt equity ratio have positive impact on earnings per share of the quoted deposit money banks. From the above 

results we conclude that equity value have greater impact on earnings per share than debt equity ratio. We 

recommend that management should ensure optimal capital structure of the quoted deposit money banks. 

 

Keywords: Corporate Earnings, Debt Equity Ratio, Leveraged Structure. 

 

1. Introduction 

The agency theory formulated by Jensen and Meckling in 1973 separate the owners of the firm from the 

management. The management entrust the operation of the firm with the objective of optimizing the interest of 

the owners without conflict of interest. Maximizing the interest of the shareholders is a critical management 

function that requires strategic and tactical planning such as optimal capital mix. Corporate organizations have 

financial goals and strategy which is the expression of a corporate mission and strategy that are determine by the 

long-term planning system as a trade-off among conflicting and competing interest. Corporate objective relates 

to four corporate fundamental goals of maximizing corporate profitability, maximizing Returns on Investment, 

maximizing corporate growth and availability of fund (Pandey, 2005). 

Corporate Earnings are the net benefits of a corporation‟s operation. It is the amount on which corporate tax is 

due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT 

earnings before interest and taxes, EBITDA earnings before interest, taxes, depreciation, and amortization. 

Earnings typically refer to after-tax net income. Earnings are the main determinant of share price, because 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

27 
 

earnings and the circumstances relating to them can indicate whether the business corporate firms are profitable 

and successful in the long run. Earnings are perhaps the single most studied number in a company's financial 

statements, because they show a company's profitability compared to analyst estimates and company guidance. 

Corporate earnings are studied because they represent a direct link to company performance. Earnings per share 

are a commonly cited ratio used to show the company's profitability on a per-share basis. It is also commonly 

used in relative valuation measures such as the price-to-earnings ratio. The price-to-earnings ratio, calculated as 

price divided by earnings per share, is primarily used to find relative values for the earnings of companies in the 

same industry. A company with a high price compared to the earnings it makes is considered overvalued. 

However, a company with a low price compared to the earnings it makes is undervalued. 

Corporate earnings is mainly determine by management factors such as debt equity ratio, the market value of 

equity, profitability, composition of assets, investment and dividend policies (Anyamobi and Lucky, 2017).Debt 

and equity are the two major classes of liabilities, with debt holders and equity holders representing the two 

types of investors in the firm. Each of these is associated with different levels of risk, benefits, and control. 

While debt holders exert lower control, they earn a fixed rate of return and are protected by contractual 

obligations with respect to their investment. Equity holders are the residual claimants, bearing most of the risk, 

and, correspondingly, have greater control over decisions. The classical opinion such as Gordons (1959) opined 

that micro forces such as profitability level of a firm are an indicator that the firm is capable of adding value 

shareholders (Lintner, 1956). The classical models of financial evaluation indicate that capital structure like the 

dividend policy is important, since optimal capital mix effect the value of the corporate firm. It is used as 

financial signaling to outsiders regarding the stability and growth prospects of the firm (Ross, 1977). Capital 

structure is the mix of the sources of finances that is used by the firms to finance their operations and assets 

(Modigliani & Miller, 1958). The debt-to-equity ratio of a firm determines how cash flows will be shared 

between debt holders and equity holders the justification of financial leverage existence is project earnings 

achievement before interest and taxes higher than the cost of funding and the increase or decrease in operating 

profits financing cost will lead to an increase or decrease in return on equity. Corporate firms can reduce 

leverage level in order to reduce the risk level or because of unwillingness in adopting compressed financial 

policy in order commit toward debt holder (Jensen, 1986). While there are many studies that have dealt with the 

problem of capital structure and corporate performance (Akani and Lucky, 2016, Ujah and Brusa, 2013, 

Innocent et al, 2014, David and Olorunfemi, 2010), there are limited studies of citable significant that include 

prime equity and corporate earnings in deposit money banks in Nigeria, therefore this study intend to examine 

prime equity, leverage structure and corporate earnings with focus on quoted deposit money banks in Nigeria. 

Apart from section one above, section two focuses on both theoretical and empirical review of related literature, 

section three deals with the research methodology. Section four deals with the data analysis and presentation and 

the fifth section contain the conclusion and recommendations from the findings. 

2. Literature Review 

2.1 Financial Leverage  

Financial leverage is a measure of how much firm uses equity and debt to finance its assets. As debt increases, 

financial leverage increases. Management tends to prefer equity financing over debt since it carries less risk 

(Matt, 2000). Financial leverage takes the form of a loan or other borrowing (debt), the proceeds of which are 

re-invested with the intent to earn a greater rate of return than cost of interest. An unlevered firm is an all-equity 

firm, whereas a levered firm is made up of ownership equity and debt (Andy, Chuck & Alison, 2002). Leverage 

allows a greater potential returns to the investor than otherwise would have been available, but the potential loss 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

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is also greater if the investment becomes worthless, the loan principal and all accrued interest on the loan still 

need to be repaid (Andy et. al., 2002) 

Pandey (2010) assert that the financial leverage employed by a company is intended to earn more return on the 

fixed-charge funds than their costs. The surplus (or deficit) will increase (or decrease) the return on the owners‟ 

equity. The rate of return on the owners‟ equity is levered above or below the rate of return on total assets. Thus, 

financial leverage is considered as a double-edged sword because it provides the potentials of increasing the 

shareholders‟ earnings as well as creating the risks of loss to them  

2.1.1 Measures of Financial Leverage 

 Total Debt Ratio 

Total debt ratio measures the amount of a firm‟s total assets that is financed with external debt. This measure 

encompasses all short term liabilities and long-term liabilities. Nwude (2003) contend that this measures portion 

of the firm‟s assets that is financed by creditors. As the total debt ratio increase, so do a firm‟s fixed-interest 

charges, if the total debt ratio becomes too high, the cash flow the firm generates during economic recessions 

may not be sufficient to meet interest payments. In terms of its significance to a firm, theoretical literatures 

predict that debt is positively correlated with level of investment. For example, long and Malitz (1985) found a 

significant positive relationship between the rate of investment in fixed plant and equipment and level of 

borrowing. The total debt ratio is measured by dividing total debt with the total assets of the firm.  

 

Total Debt ratio =  Total Assets  

               Total Debt                                   1 

 Debt Equity Ratio 

Debt equity ratio is similar to the debt ratio and relates the amount of a firm‟s debt financing to the amount of 

equity financing. Actually, this measure of leverage ratio is not actually a new measure; it is simply the debt 

ratio in a different format. Debt equity ratio is the quantitative measures of the proportion of the total debt to 

residual owners‟ equity (Nwude, 2003). Thus, it is an indicator of company‟s financial structure and whether the 

company is more reliant on borrowing (debt) or shareholders capital (equity) to fund assets and activities.  

Debt equity ratio =  Shareholders Funds 

                        Total Debt                                 2 

 Equity Financing 

Equity investment simply means shareholders‟ fund or sweat money (Dagogo and Ollor, 2009). Two strands of 

equity investment exist: public and private equity investments. Public equity investment involves raising share 

capital directly from the public through the stock exchange, while private equity involves investment in a private 

company by a few investors or institutional investors. It has been proved severally that the value of a firm 

increases more with increasing leverage, Durand (1959) and Ezra (1963). Perhaps, this explains why there is still 

strong emphasis on the use of debt despite the overwhelming contribution of Franco Modigliani and Merton 

Miller (MM) in 1958 on the irrelevance of capital structure. However, MM position in a world of taxes (which is 

a more realistic assumption) implies that the expected return on equity increases as the debt-equity ratio increases. 

Therefore shareholders cannot be indifferent to increased leverage when it increases expected return, Brealey and 

Myers (1996). 

2.2 Theorectical Framework 

 The Modigliani-Miller: Irrelevant and Relevant Theory  

 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

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Modigliani and Miller (MM) 1958 illustrates that under certain key assumptions, firm‟s value is unaffected by its 

capital structure. Capital market is assumes to be perfect in Modigliani and Miller‟s world, where insiders and 

outsiders have free access to information; no transaction cost, bankruptcy cost and no taxation exist; equity and 

debt choice become irrelevant and internal and external funds can be perfectly substituted. The M-M theory 

(1958) argues that the value of a firm should not depend on its capital structure. The theory argued further that a 

firm should have the same market value and the same Weighted Average Cost of Capital (WACC) at all capital 

structure levels because the value of a company should depend on the return and risks of its operation and not on 

the way it finances those operations. Miller brought forward the next version of irrelevance theory of capital 

structure. He appealed that, capital structure decisions of firms with both corporate and personal taxes 

circumstances are irrelevant (Miller 1977).  

They first hypothesized that if markets are perfectly competitive, firm performance will not be related to capital 

structure, there by suggesting no significant relationship between a firm„s capital structure and its performance. 

The value of the firm is similarly unaffected by its financial structure. Their assumptions of a perfectly 

competitive market exclude the impacts tax, inflation and transaction costs associated with raising money or 

going bankrupt. In addition they also assume that disclosure of all information is credible, thus there is no 

information asymmetry (Hamada, 1969 and Hatfield et.al, 1994).  

 Static Trade-Off Theory 

Kraus and Litzenberger (1973) opined that the static trade-off theory assumes that firm‟s trade-off the benefits 

and costs of debt and equity financing and find an optimal capital structure after accounting for market 

imperfections such as taxes, bankruptcy costs and agency costs. The theory states that there is a benefit to 

financing with debt, specifically the tax benefit. However there is also a cost of financing with debt, namely the 

indirect bankruptcy costs and the more direct financial distress costs of debt. This is thus the trade-off that all 

firms, whom are maximizing value, should focus on when choosing the amount of debt and equity needed to 

finance their operations. Needless to say, there is a maximum point where the marginal benefit of further 

increases in debt declines as debt increases, whereas the marginal cost increases. 

 Pecking Order Theory  

The pecking order theory of capital structure as introduced by Donaldson (1961) is among the most influential 

theories of corporate leverage. It goes contrary to the idea of firms having a unique combination of debt and equity 

finance, which minimize their cost of capital. The theory suggests that when a firm is looking for ways to finance 

its long-term investments, it has a well-defined order of preference with respect to the sources of finance it uses. It 

states that a firm‟s first preference should be the utilization of internal funds (retain earnings), followed by debt 

and then external equity. He argues that the more profitable the firms become, the lesser they borrow because they 

would have sufficient internal finance to undertake their investment projects. He further argues that it is when the 

internal finance is inadequate that a firm should source for external finance and most preferably bank borrowings 

or corporate bonds. And after exhausting both internal and bank borrowing and corporate bonds, the final and least 

preferred source of finance is to issue new equity capital.  

 Agency Theory and Capital Structure Choice 

Most of the hypotheses formulated in the following are based on the economic principal-agent theory, where a 

positive effect stems from the amelioration of the shareholder-management conflict, by disciplining the 

management. Analogously, an aggravation of the conflict results in a negative effect. The principal-agent theory 

is part of the new institutional economics, which developed as extension of the neoclassicism. It abandons the 

assumption of a complete market by allowing informational asymmetries and transaction costs to cause 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

30 
 

incomplete contracts. This leads to a methodological individualism, which does no longer consider institutions 

as profit maximizing collectives, but as a “nexus for a complex set of explicit and implicit contracts of 

individuals. Consequently, the economic focus on markets is shifted to man-made institutions, incorporating the 

individual into economic theory. The agency theory in particular analyzes the contractual conflicts arising from 

informational asymmetry. An agency relation is based on an explicit or implicit contract between the agent and 

the principal delegating decision power to the agent. Due to the contract, the agent‟s actions influence the utility 

of both contractual partners. However, the agent behaves opportunistically maximizing his profit regardless of 

the principal‟s interests. In the case of incomplete informational structures for the benefit of the agent, the 

principal cannot prevent those harming actions. Consequently, an agency conflict requires two conditions, a 

conflict of interest through diverging utility functions of the principal and the agent as well as the existence of 

informational asymmetries.  

 Empirical Review 

Anyamaobi and Lucky (2017) examined corporate characteristics and value creation of quoted manufacturing 

firms in Nigeria. The objective was to examine if factors within the control of management affects corporate 

value. Cross sectional data was sourced from financial statement of twenty quoted manufacturing firms. Market 

value was proxy for dependent variable while asset tangibility, return on investment, risk, liquidity, firm size, 

debt equity ratio, dividend payout ratio, retention ratio, corporate governance, management efficiency and cost 

of capital was proxy for independent variables. After cross examination of the validity of the pooled effect, fixed 

effect and the random effect, the study accepts the fixed effect model. Findings reveal that assets tangibility, 

return on investment, debt equity ratio, retention ratio, management efficiency and cost of capital have positive 

effect on the market value of the quoted manufacturing firms while risk, liquidity, firm size and corporate 

governance have negative effect on the market value.  

Akani and Lucky (2016) examined the effects of capital structure on shareholders‟ value of quoted Nigerian 

commercial banks from 1981 – 2014. The model built for the study proxy Return on Investment (ROI), Equity 

Price (EQP) and Earnings per Share (EPS) as dependent variables measuring shareholder‟s value as the function 

of percentage in Debt Capital to Total Capital (DC/TC), percentage of Equity Capital to Total Capital (EQC/TC), 

percentage of Preference Share Capital to Total Capital (PSC/TC as independent variables). The Econometrics 

Techniques of Ordinary Least Square (OLS), Augmented Dickey Fuller (ADF), Unit Root Test, Johansen 

co-integration test and pair wise Granger Causality test were employed in the empirical analysis. R2, Regression 

coefficient, probability value, t-statistics and f-statistics were used to determine the extent to which the 

independent variables can affect the dependent variable. The co-integration result shows that long run 

equilibrium exists among the variables except preference share capital. In model I, the study found that all the 

independent variables have positive relationship with the Return on Investment. Model II found that equity 

capital and preference share capital have positive effects but insignificant relationship with Return on 

Investment while short term borrowings and preference share capital have positive relationship and debt capital 

have negative relationship with Equity Price of quoted commercial banks. Model III found that Equity Capital 

has positive relationship while debt and preference share capital have negative relationship with Earnings per 

Share. From the regression summary, Model I can explain 79% variation on Return on Investment, Model II 

explains 48% variation on Equity Prices while Model III explains only 11% variation on Earnings per Share. 

From the above, the study concludes that capital structure has more effect on Return on Investment and Equity 

prices than Earnings per Share.  

 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

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31 
 

Al – shimmiri, (2003)   showed a relationship between firms‟ performance and datedness level, as well as a 

direct relationship between internal investor ownership and financing decisions for these industries, furthermore 

financing decision has a close correlation with firms size and profitability.  Kareem (2006) The study revealed 

a significant relationship between weighted average capital cost and stocks market returns, where external (debt) 

financing has more affection stocks market return compared to internal (owned) financing. Salah, (2007) study 

revealed that ranking companies according to their assets growth rate in the previous year was not superior to 

ranking them according to profit / price percentage and distribution to price ratio. In general the study revealed 

that distribution to price ratio was superior to the other strategies.  Abdel Ghani, (2008) study attempted to find 

out the effect of financing decision on institutions' financial performance and tax and financing cost effects. The 

study showed that positive financial performance is contingent on the institution ability in forming the optimal 

mix of financial structure.  

Tian and Zeitun (2007) investigated the effect of capital structure on corporate performance of corporations in 

Jordan using a panel data approach of 167 companies for a period of 15 years from1989 to 2003. The study used 

ROA, ROE, EBIT and tax plus depreciation to total assets (PROF) as proxies for accounting performance 

measurements and Tobin‟s Q, market value of equity to book value of equity (MBVR), price/earnings (P/E) ratio 

and market value of equity plus book value of liabilities divided by book value of equity (MBVE) as market 

performance measures. The results show that a firm‟s capital structure has significant negative effect on the 

firms‟ performance using both the accounting and market measurements. Mwangi, Makau and Kosimbei (2014) 

investigated the relationship between capital structure and performance of 42 non-financial companies listed in 

the Nairobi Securities Exchange, Kenya. The study used secondary panel data contained in the annual reports 

and financial statements of the sampled listed firms, and employs panel data models (random effects) and 

feasible generalized least square (FGLS). The results show that financial leverage is statistically negatively 

related to performance measured by return on assets and return on equity.  

Maina and Kondongo (2013) in an attempt to validate Modigliani and Miller (1963) theory in Kenya, examined 

the effects of debt-equity ratio on performance of firms listed at the Nairobi Securities Exchange for the period 

2002- 2011. The study finds that firms listed at Nairobi Securities Exchange rely more on short term debt. The 

result also reveals that significant negative relationship exists between debt-equity ratio and all measures of 

performance. The result also provides support for MM theory that capital structure is relevant in determining the 

performance of a firm.  Ebaid (2009) carried out a study to investigate the impact of choice of capital structure 

on the performance of firms in Egypt. ROE, ROA, and gross profit margin were used as proxies for performance 

while financial leverage was measured using short-term debt to asset ratio, long-term debt to asset ratio, and 

total debt to total assets. Multiple regression technique was applied to determine the relationship between the 

leverage and performance. The result reveals that leverage has no impact on a firm‟s performance.  

Maroko (2014) examined the influence of capital structure on organizational financial performance of firms 

listed in Nairobi Securities Exchange. The study employs secondary data sourced from financial statements of 

sampled listed firms‟ which were selected using stratified random sampling technique. Multiple regression 

technique was used to explain the relationship between financial leverage, cost of equity, debt interest and 

organization financial performance. The findings showed that positive relationship exist between financial 

leverage, cost of equity, debt interest and organization financial performance.  Gweji and Karanja (2014) 

investigated the effect of financial leverage on firm performance of deposit taking savings and credit 

co-operative in Kenya. The study utilized secondary data sourced from financial statements of 40 savings and 

credit co-operative societies (SCCOS) sampled for the study from 2000 to 2012. Descriptive and analytical 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

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designs were both adopted. The result show perfect positive correlation between financial leverage surrogated 

by debt-equity ratio with ROE and profit after tax at 99% confidence interval, and a weak positive correlation 

between debt-equity ratio with ROA and income growth.  

Innocent, Ikechukwu and Nnagbogu (2014) conduct a study on the effect of financial leverage on financial 

performance: evidence from quoted pharmaceutical companies in Nigeria for the period 2001- 2012. Financial 

leverage surrogated by debt ratio (DR), debt-equity ratio (DER), and interest coverage ratio (ICR) was used as 

independent variable while financial performance proxy by ROA was used as dependent variable. The study 

utilized secondary data sourced from financial statements of 3 pharmaceutical companies quoted on the 

Nigerian Stock Exchange. Descriptive statistics, Pearson correlation and multiple regressions were employed in 

order to determine the relationship between financial leverage variables and performance measure variable 

identified in the study. The results showed that debt ratio and debt-equity ratio have negative relationship with 

ROA, while interest coverage ratio has a positive relationship with ROA in Nigerian pharmaceutical industry. 

The study also reveals that on aggregate financial leverage variables have no significant effect on financial 

performance of sampled companies.  

Thaddeus and Chigbu (2012) studied the effect of financial leverage on bank performance using 6 banks from 

Nigeria. The study utilized secondary data from Nigerian Stock Exchange fact book and the financial statements 

of the sampled banks. Debt-equity and coverage ratios were taken as proxies for financial leverage and these 

constitute the independent variables, while earning per share (EPS) representing performance is the dependent 

variable. Multiple regression technique was used to establish whether relationship exist between financial 

leverage and performance of sampled banks. The findings show mixed results. While some banks report positive 

relationship between leverage and performance, others revealed negative relationship between leverage and 

performance. Laurent (2002) studied the relationship between leverage and corporate performance in France, 

Germany and Italy. The multiple regression technique was adopted on the study variables (leverage, tangibility, 

short-term liabilities, inventory and size). The study found mixed evidence depending on the country; while 

negative relationship was reported in Italy, the relationship between leverage and corporate performance is 

significantly positive in France and Germany. Laurent (2008) investigates the relationship between leverage and 

corporate performance of medium-sized firms from seven European countries using a maximum likelihood 

procedure to estimate a stochastic cost frontier and the parameters of an equation relating cost inefficiency to 

leverage simultaneously. Findings indicate that relationship between leverage and corporate performance varies 

across countries which tend to support the influence of institutional factors on this relationship.  

Akhtar et al. (2012) examined the relationship between financial leverage and financial performance using the 

Fuel and Energy Sector of Pakistan. The findings showed a positive relationship between financial leverage and 

financial performance of the companies thus confirming that the firms having higher profitability may improve 

their performance by having high levels of financial leverage. In addition, the study provides evidence that the 

players of the fuel and energy in Pakistan can improve their financial performance by employing the financial 

leverage and can arrive at a sustainable future growth by making vital decisions about the choice of their 

optimal capital structure. Akinmulegun (2012) tests the effect of financial leverage on selected indicators of 

corporate performance Earnings per Share (EPS), Net Assets per Share (NAPS) in Nigeria using the Vector 

Auto-Regression (VAR) technique. Findings indicated that leverage shocks exert significantly on corporate 

performance. Also, the measures of corporate performance (EPS, NAPS) depends more on feedback shock and 

less on leverage shock but the leverage shocks on EPS indirectly affect NAPS of firms as the bulk of the shock 

on NAPS was received from EPS of the firms. Akande (2013) apply the Ordinary Least Square (OLS) 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

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regression analysis on panel data collected from financial statements of 10 Nigerian firms over 20 years from 

1991- 2010. ROA, ROE, EPS and DPS on one hand and DC (total debts to capital employed) on the other hand, 

were surrogated for firm‟s performance and debt financing respectively. The findings show that positive 

relationships exist between DC and ROE, EPS and DPS, while negative relationship exists between DC and 

ROA. The study therefore, concluded that financial leverage will considerably impact on firm performance.  

Onaolapo and Kajola (2010) investigate the effect of capital structure on financial performance of companies 

listed on the Nigerian Stock Exchange. This study was performed using 30 non-financial companies in 15 

industry sectors in a 7-year period from 2001 to 2007. The results showed that financial leverage (debt ratio) has 

a significant negative effect on financial performance (ROA and ROE) of sampled firms. Fosu (2013) examined 

the relationship between capital structure and firm performance using panel data approach comprising 257 

South African firms for the period 1998- 2009. The results uncover evidence that provides support for 

significant positive relationship between financial leverage and firm performance. David and Olorunfemi (2010) 

study the impact of capital structure on corporate performance of firms in the Nigerian petroleum industry for 

the period 1999- 2005. The study employed panel data analysis using fixed-effect estimation, random-effect 

estimation and maximum likelihood estimation. The study found that there is positive relationship between 

leverage and firm performance surrogated by earning per share and dividend per share.  

Chinaemerem and Anthony (2012) carry out a study on the impact of capital structure on financial performance 

of Nigerian firms using a sample of 30 non-financial quoted companies on the Nigerian Stock Exchange (NSE) 

for a period of 7 years from 2004- 2010. Panel data for the selected companies were generated and analyzed 

using ordinary least squares (OLS) method of estimation. The results show that a firm‟s capital structure 

surrogated by debt ratio has a significantly negative relationship with the firm‟s financial performance 

surrogated by ROA and ROE. This finding provides evidence in support of agency cost theory.  

Al-Taani (2013) investigate the relationship between capital structure and firm‟s performance across 45 

Jordanian manufacturing companies listed on Amman Stock Exchange for a period of 5 years from 2005- 2009. 

The study variables include: return on assets (ROA), profit margin (PM), short term debt to total assets 

(STDTA), long term debt to total assets (LTDTA) and total debt equity (TDE). ROA and PM constitute the 

dependent variables and were used as proxies for performance, while STDTA, LTDTA and TDE represent the 

independent variables and were taken as proxies for capital structure. Two multiple regressions in which ROA 

was regressed on STDTA, LTDTA and TDE, and PM was also regressed on the same explanatory variables were 

used. The results show that there is no significant relationship between STDTA and ROA, TDE and ROA, 

STDTA and PM, LTDTA and PM, and TDE and PM. However, the result also reveals that significant negative 

relationship exists between LTDTA and ROA. Leon (2013) investigate the impact of capital structure on 

financial performance of 30 listed manufacturing firms in Sri Lanka for a period of 5 years from 2008- 2012. 

The study used correlation and regression techniques in the analysis of data using statistical package for social 

sciences (SPSS). The results show on one hand, that there was a significant negative relationship between 

leverage and return on equity, and on the other hand, there was no significant relationship between leverage and 

return on assets.  

Rehman (2013) investigate the relationship between financial leverage and financial performance of 35 listed 

sugar companies in Pakistan for a period of 6 years from 2006- 2011. Correlation technique was used by taking 

financial leverage proxy by debt-equity ratio as independent variable and financial performance surrogated by 

EPS, NPM, ROA, ROE and sales growth as dependent variables. The results show that financial leverage has a 

positive relationship with ROA and sales growth, and negative relationship with EPS, NPM and ROE. Yoon and 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

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Jang (2005) conduct a study on the relationship between return on equity (ROE), financial leverage and size of 

62 restaurant firms in US for the period 1998 to 2003 using ordinary least squares (OLS) regressions. Results 

show that high leveraged firms were less risky in both market and accounting-based performance measures. The 

results also found support for positive relationship between financial leverage and both measures of 

performance. Additionally, the results further indicate that firm size had a more dominant effect on ROE than 

debt, and regardless of the level of leverage, smaller firms were relatively more risky than larger firms. Ujah and 

Brusa (2013) examine the effects of financial leverage and cash flow volatility on earnings management using 

559 US firms for a period of 20 years from 1990 to 2009. The findings provide evidence that suggest that 

financial leverage and cash flow has an impact on the extent to which firm‟s manage their earnings. The results 

also revealed that earnings management of firms varies according to industry they belong.  

3. Research Methodology 

Descriptive and longitudinal design was employed with a view to making statistical inferences on factors that 

determine corporate value of quoted manufacturing firms. A  Sampling frame of 15 quoted deposit money banks 

was selected using random sampling techniques. The required cross-sectional data were sourced from annual 

reports of the banks and stock exchange factbook from 2011-2016. 

3.1 Analytical Framework and Empirical Model Specification 

This analysis is carried out within a panel data estimation framework. The preference of this estimation method 

is not only because it enables a cross-sectional time series analysis which usually makes provision for broader 

set of data points, but also because of its ability to control for heterogeneity and endogencity issues. Hence panel 

data estimation allows for the control of individual-specific effects usually unobservable which may be 

correlated with other explanatory variables included in the specification of the relationship between dependent 

and explanatory variables (Hausman and Taylor, 1981). The basic framework for panel data regression takes the 

form: 

1 

 

In the equation above, the heterogeneity or individual effect is 
iZ  which may represent a constant term and a 

set of observable and unobservable variables. When the individual effect iZ ,
contains only a constant term, 

OLS estimation provides a consistent and efficient estimates of the underlying parameters (Kyereboah-Coleman, 

2007); hut if iZ
,

 is un-observable and correlated  

with itX , then emerges the need to use other estimation method because OLS will give rise to biased and 

inconsistent estimates. 

Similarly for endogeneity issues, it is generally assumed that the explanatory variables located on the right hand 

side of the regression equation are statistically independent of the disturbance it  such that the disturbance 

term it  is assumed to be uncorrelated with columns of‟ the parameters itX  and itZ  as stated in equation 

(1), and has zero mean and constant variance  2
(Hausman and Taylor, 198). If this assumption is violated, 

itiitit ZXY   ,,



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

35 
 

then OLS estimation will yield biased estimates of the underlying parameters of  (Mayston, 2002).Hence, 

endogeneitv problems arise when the explanatory variables are correlated with the disturbance term 

it (Mayston, 2002; Hausman and Taylor, 1981). In order to circumvent these problems, panel estimation 

techniques of fixed and random effects will be adopted in this study, in addition to the traditional pooled 

regression estimation. Decisions will be made between the fixed and random effect models using the Hausman 

specification test. The panel model for the study is specified base on the modified model of Akeem, Edwin, 

Kiyanjui and Kayode (2014). 

itiitit ZXY   ''
              2

 

Where: 

Y = dependent variable 

D = independent variable 

o  = intercept 

i  = coefficient of the explanatory variable 

e = error term 

I = cross-sectional variable 

T = time series variable 

Model Specification 

 

EPS = F(EV)                                    3 

Pooled regression specification 

                       4  

 

Fixed Effect Model Specification 

itiiitit idumEVoEPS 111 9

1       
5

 

Random effect model specificatiosn  

ititit iEVoEPS 111  
    6 

EPS = F(DER)        7 

Pooled regression specification 

itiDERoEPS 11  
                                       8 

Fixed Effect Model Specification 

itiiitit idumDERoEPS 111 9

1   
            9

 

itiEVoEPS 11  



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

36 
 

Random effect model specification   

ititit iDERoEPS 111  
      10 

Where 

EPS = Earnings per share  

EV = Equity Value 

DER = Debt Equity Ratio 

1   =  Stochastic or disturbance/error term.  

t  =  Time dimension of the variables  

α 0  =  Constant or intercept.  

 

 

 

 

 

 

4. Result and Discussion 

4.1 Presentation of Results: Equity Value and Earnings per Share 

Table 1: Testing the Significance of the Models 

Test: Redundant Chi –Sq Stat Df Prob 

Cross-section F 11.724740 (9,38) 0.0000 

Cross-section Chi-square 66.445337 9 0.0000 

TEST: Hausman CHI –SQ STAT DF PROB 

Cross-section random 0.718309 2 0.6983 

Source: Extract from E-View Windows 9.0 

For the purpose of decision making regarding choice between fixed and random effects Hausman test was run. 

The decision of choice between fixed and random effect is based on p-value of Hausman test. If the p - value of 

the Hausman test is less than 0.05, we have a preference to use a fixed effects model. On the other hand if the 

p-value of the Hausman test is more than 0.05, we select to use fixed effects.  In this study, the p-value of 

Hausman test was more than 0.05 so fixed effects are used. For comparison purpose pooled regression results 

are also given.  Value may be shown as F-Value. “F” value of the table signifies whether the overall model is 

statistically significant or not. The more the F value or Wald chi square test value the more the model is 

considered not significant.  From the above, the study adopts the fixed effect model for the three models above. 

Table 2 Equity Value and Earnings per Share of Deposit Money 

Pooled   Effect Fixed   Effect Random Effect 

Variable  Coefficient T-Stat P-Value  Coefficient T-Stat P-Value  Coefficient T-Stat P-Value 

EV 8.76E-05 1.138244 0.2608 7.44E-05 0.922395 0.3621 6.72E-05 0.909176 0.3679 

β0 1.823160 4.100633 0.0002 2.338500 4.486475 0.0001 2.101920 3.594702 0.0008 

R-squared 0.026857 1.138244 0.2608 0.742344   0.022935   

Adj R2 0.014554   0.667760   -0.018642   

F-statistic 0.648548   9.953051   0.551628   

F-Prob 0.527419   0.000000   0.579695   

    DW 0.861168          1.888071   1.723324   

Source: Extract from E-View Windows 9.0 

Variable Notation Effect 

Earnings per share EPS Dependent 

Variable 

Debt Equity Ratio
 

DER + 

Equity value
 

EV + 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

37 
 

Result from the table above, proved evidence on the relationship between equity value and earnings per share of 

commercial banks. It is evidence that the independent variable which is equity value can explain 74.2% and 

66.7% variation on the dependent variable which is earnings per share. The remaining 26.8% and 34.3% can be 

explained by exogenous variables not captured in the model. The F-statistics and the F-probability justifies that 

the model is significant as the probability value of 0.000000 is less than the critical value of 0.05. However, the 

T statistics and probability prove that equity value is statistically not significant in explain variation in earnings 

per share. The β coefficient indicates that number of equity value have positive impact on earnings per share.  

Table 3: Testing the Significance of the Models: Model II 

Test: Redundant Chi –Sq Stat Df Prob 

Cross-section F 7.181278 (9,38) 0.0000 

Cross-section Chi-square 49.677937 9 0.0000 

Test: Hausman Chi –Sq Stat Df Prob 

Cross-section random 0.718309 2 0.6983 

Source: Extract from E-View Windows 9.0 

The table above explains the validity of the models based on decision making regarding choice between fixed 

and random effects Hausman test was run. The decision of choice between fixed and random effect is based on 

p-value of Hausman test. If the p - value of the Hausman test is less than 0.05, we have a preference to use a 

fixed effects model. On the other hand if the p-value of the Hausman test is more than 0.05, we select to use 

fixed effects.  In this study, the p-value of Hausman test was more than 0.05 so fixed effects are used. For 

comparison purpose pooled regression results are also given.  Value may be shown as F-Value. “F” value of the 

table signifies whether the overall model is statistically significant or not. The more the F value or Wald chi 

square test value the more the model is considered not significant.  From the above, the study adopts the fixed 

effect model for the three models above. 

Table 4: Debt Equity Ratio and Earnings per Share of Deposit Money Banks 

Pooled   Effect Fixed   Effect Random Effect 

Variable 
 Coefficient 

T-Stat P-Value 
 

Coefficient 

T-Stat P-Value 
 Coefficient 

T-Stat P-VALUE 

DER 0.004785 1.811650 0.0764 0.003873 0.473331 0.6387 0.005289 1.230725 0.2245 
β0 15.99420 3.964834 0.0002 20.74188 1.471534 0.1494 16.55345 2.152492 0.0365 

R-squared 0.161578   0.689569   0.045787   

Adj R 2 0.125901   0.599707   0.005183   

F-statistic 4.528854   7.673669   1.127636   

F-Prob 0.015899   0.000001   0.332400   

    DW 0.826584 

            

1.309553  

                 

1.227520  

 

Source: Extract from E-View Windows 9.0 

Adopting the fixed effect model as validated by the Hausman test, we interpret the relationship between the 

dependent and the independent variables. The effect of Debt equity ratio on earnings per share of deposit money 

banks proves that the independent variable can explain 68.9% and 59.9% variation. This is justified by the 

significance of the F-statistics and the F-probability as it proves that the model is significant. The T-statistics and 

the probability prove that the variable is statistically not significant which implies that variation on the 

independent variable have no significant impact on the dependent variable. The β coefficient proves that debt  

equity ratio have positive impact on the dependent variable which is earnings per share of the quoted deposit 

money banks. The Durbin Watson statistics of 1.309553 is less that 1.50 but greater than 1.00, this proves that 

there is absence of serial auto correlation among the variables within the time series. 

 



Prime Equity, Leveraged Structure and Corporate Earnings in Nigeria: A Comparative Analysis 

 

  Lucky Anyike Lucky and Akobundu Charles Echewodo 

38 
 

5. Findings of the Research 

Findings from the panel data result shows that equity value and debt equity ratio of the quoted deposit money 

banks have positive relationship with earnings per share. This finding confirms the a-priori expectation of the 

results and validates the relevance theory of Gordon against the irrelevance theory of Miller and Modigliani. 

The findings confirm the empirical findings of Anyamaobi and Lucky (2017) that debt equity ratio, retention 

ratio, management efficiency and cost of capital have positive effect on the market value of the quoted 

manufacturing firms, Akani and Lucky (2016) equity capital have positive relationship with the Return on 

Investment and the findings of Rehman (2013) that financial leverage has a positive relationship with ROA and 

sales growth, and negative relationship with EPS, NPM and ROE. In comparing the effect on the variables, 

equity value can explain 74.2% and 66.7% variation on the dependent variable which is earnings per share while 

Debt equity ratio explains 68.9% and 59.9% variation. From the above we conclude that have more effect on 

earnings per share of the quoted deposit money banks. 

6. Conclusion and Recommendation 

This study intends to examine the relationship between equity value, debt equity ratio and earnings per share of 

quoted deposit money banks in Nigeria. The study found that 74.2% and 66.7% variation on earnings per share 

can be traced to equity value. The β coefficient indicates that of equity value has positive impact on earnings per 

share, while Debt equity ratio on of deposit money banks can explain 68.9% and 59.9% variation. The β 

coefficient proves that debt equity ratio have positive impact on earnings per share of the quoted deposit money 

banks. From the above results we conclude that equity value have greater impact on earnings per share than debt 

equity ratio. We recommend that management should ensure optimal capital structure of the quoted deposit 

money banks. 

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