DEBT FINANCING AS PREDICTOR OF RETURN ON EQUITY AMONG MANUFACTURING FIRMS IN OGUN STATE, NIGERIA
Keywords:
Debt Financing, Short-Term Debt, Long-Term Debt, Return on Equity, Manufacturing Firms, Ogun State.Abstract
This study investigated the influence of debt financing on the return on equity (ROE) of manufacturing firms in Ogun State, Nigeria, with particular focus on the disaggregated effects of short-term and long-term debt. Using an ex post facto research design, the study analyzed secondary data from audited financial statements and annual reports of 30 purposively selected manufacturing firms spanning the period 2019–2024. The dependent variable was ROE, while the independent variables were short-term debt (STD) and long-term debt (LTD). Control variables included firm size and asset growth. Data were analyzed using multiple regression techniques with robust standard errors to assess the individual and joint effects of debt financing on ROE. The results revealed that short-term debt had a significant negative effect on ROE (β = -.284, p = .012), indicating that overreliance on short-term borrowings constrains liquidity and reduces shareholder returns. In contrast, long-term debt exerted a significant positive effect on ROE (β = .312, p = .004), suggesting that stable long-term financing supports productive investments and enhances profitability. Firm size and asset growth also positively influenced ROE, with coefficients of .126 (p = .032) and .098 (p = .062), respectively. The joint effect of short-term and long-term debt on ROE were significant (F = 12.47, p < .05), confirming that capital structure decisions collectively determine firm performance. The study concludes that debt financing has a dual effect on ROE: long-term debt enhances profitability, whereas short-term debt may reduce returns if overused. These findings underscore the importance of strategic debt management and suggest that manufacturing firms in Ogun State should prioritize long-term borrowings and minimize reliance on short-term debt to optimize equity returns. The study contributes recent, region-specific evidence on debt maturity and firm performance, providing insights for managers and policymakers seeking to enhance financial sustainability in the manufacturing sector.
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