Leverage and profitability of listed healthcare firms in nigeria

Thesis Overview

<p> </p><p><strong>INTRODUCTION</strong></p><p><strong>1.1 Background to the study</strong></p><p>The term capital structure refers to the combination of diverse option and financial framework in which a firm uses to finance in its trading, operating and investing activities. It largely consists of external debt, external equity and internal equity (Ong &amp; Teh, 2011; Chowdhury &amp; Chowdhury, 2010). Depending on the need of the firm, the financial manager may chose to use any of the available sources of capital or a combination of all, and that forms the firm’s capital structure. The survival, sustenance and profitability of a firm hinges on its capital structure; hence, it is so crucial and very important to the firm. According to Prasad, Green and Murinde (2003) capital structure of a firm is a major prerequisite to the firm’s ability to succeed by making profit and satisfying its shareholders and other contributor of capital. Prasad <em>et al</em>&nbsp;(2003) identified improper financing strategy and capital structure as leading factors to business collapse in developing countries. However, the bane of financial managers in developing and developed countries would be finding the right balance or proportion of capital structure mix that suits their respective economies and businesses.</p><p>In a bid to understanding how leverage affects firms, there is need to understand profitability and its influence on leverage choices. Profitability, which is usually regarded as the lifeblood of a business venture, is another key ingredient that affects manager’s decisions on the use of leverage in firms capital structure (Ali &amp; Iman, 2011). For newly established business enterprise, the use of leverage as a finance option may be for stability and expansion but for old existing firms the need for leverage might be different. Policies on the use of leverage are expected to change in the event where profit is involved. Profitability as a key aspect of business survival may have different types of impact on the firm’s capital structure and this effect may range from positive to negative territories (Adeyemi &amp; Oboh, 2011; Ali &amp; Iman, 2011; Akintoye, 2008; Titan &amp; Zetium, 2007). Having said the above, the relevance of leverage to firm’s value was questioned in the famous work of Modigliani and Miller of 1958, where they argued that capital structure has no relevance on the value of the firm under the perfect market condition settings. However, many researchers questioned this proposition, among which, is the work of Jensen and Meckling (1976), they postulated that the amount of leverage in a firm’s capital structure affects the managers’ choice of operating activities and that it has a bearing on the overall firm performance and its’ total value. Many other researchers argued that capital structure has an effect on the overall value of firms only that this effect ranges from positive to negative (Ali &amp; Iman, 2011; Oke &amp; Afolabi, 2008 and Abor, 2005). Pragmatically, the conclusion reached by previous research, which ranges from positive to negative shows the uniqueness of each country’s economy in terms of its market</p> <br><p></p>