THE MODERATING EFFECT OF FIRM SIZE ON THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE

This study assesses the moderating effect of firm size on the relationship between capital structure
and financial performance among listed firms in Nigeria over a ten-year period (2014–2024). An
ex post facto research design was adopted, utilizing secondary data extracted from audited annual
reports of firms listed on the Nigerian Exchange Group (NGX), the NGX Factbook, and the Central
Bank of Nigeria (CBN) Statistical Bulletin. The study employed panel regression and moderation
analysis techniques within the frameworks of the trade-off and pecking order theories to examine
how firm size influences the leverage–performance relationship across major sectors of the
Nigerian economy. Financial performance was measured using three key indicators Return on
Assets (ROA), calculated as Net Income divided by Total Assets; Return on Equity (ROE),
computed as Net Income divided by Shareholders’ Equity; and Tobin’s Q, determined as (Market
Value of Equity plus Book Value of Debt) divided by Total Assets. Capital structure was measured
through the Debt Ratio (Total Debt ÷ Total Assets), Debt-to-Equity Ratio (Total Debt ÷ Total
Equity), and Long-Term Debt Ratio (Long-Term Debt ÷ Total Assets). Firm size, the moderating
variable, was proxied by the natural logarithm of total assets (LnTA) to capture scale effects. The
regression model incorporated an interaction term between capital structure and firm size to test
for moderation. Results from the panel regression revealed that firm size significantly moderates
the relationship between capital structure and financial performance (β = 0.412, p < 0.05).
Specifically, larger firms exhibited a stronger and more positive leverage performance
relationship, implying that firm size enhances the capacity to manage debt efficiently and convert leverage into improved profitability. In contrast, smaller firms showed a weaker and often negative
interaction, reflecting limited access to capital markets, higher borrowing costs, and increased
exposure to financial distress. These findings support the trade-off theory, which posits that larger
firms benefit from economies of scale, lower bankruptcy risks, and more favorable financing terms
when leveraging debt. The results also align with the pecking order theory, suggesting that smaller
firms’ limited internal financing capacity compels them to depend more heavily on costlier
external financing sources. The study contributes to corporate finance scholarship by extending
empirical understanding of firm-specific moderating variables in emerging markets. It offers
practical insights for optimizing capital structure decisions through firm size considerations. The
research recommends that policymakers, financial managers, and investors incorporate firm size
effects into capital structure models to enhance financial sustainability, competitive positioning,
and long-term value creation within Nigeria’s dynamic economic landscape.

Funding: This is self-funded research.

Conflict of Interest: The authors declare no conflicts of interest.

Ethics Approval: Not_applicable

Data Availability: Data will be provided upon reasonable request.

AI-Assisted Writing: No AI tools were used in the preparation of this manuscript.