Journal of Economics and Trade

6(1): 1-12, 2021

ISSN: 2456-8821

MODERATING EFFECT OF BOARD INDEPENDENCE ON

THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE
AND PROFITABILITY OF LISTED INDUSRIAL GOODS
COMPANIES IN NIGERIA

HABIB ABDULKARIM1* AND SALEH MOHAMMAD BAHAMMAN1

1
Department of Accounting, Gombe State University, Gombe, Nigeria.

AUTHORS’ CONTRIBUTIONS
This work was carried out in collaboration between the authors. Author HA designed the study, while author
SMB performed the statistical analysis, wrote the protocol and wrote the first draft of the manuscript. Both
authors managed the analyses of the study and author SMB managed the literature searches. Both authors read
and approved the final manuscript.

Received: 02 October 2020

Accepted: 09 December 2020
Published: 13 January 2021 Original Research Article
__________________________________________________________________________________

ABSTRACT

Owing to inconclusive results on the relationship between capital structure and profitability world over, there is
need to take into consideration a moderating variable to strengthen the relationship. This study therefore,
introduces board independence as moderator to examine its effect on the relationship between capital structure
and profitability of listed industrial goods companies in Nigeria for the period 2006-2018. The population of the
study comprises of all the twenty one (21) listed industrial goods companies in Nigerian Stock Exchange (NSE)
as at December, 2018. Out of which ten (10) companies constitute the sample of the study. The study utilized
documented data collected from annual reports and accounts of the sampled companies, data was first analysed
by means of descriptive statistics to provide summary statistics for the variables subsequently, correlation
analysis was carried out using Pearson correlation technique for the correlation between the dependent and
independent variables and OLS regression technique was employed. The results revealed that capital structure
proxy by debt to equity ratio has a significant positive impact on profitability while board independence
provides negative and significant effect on the relationship between capital structure and profitability of listed
industrial goods companies in Nigeria. Based on these findings the study recommends that policy makers as
well as the management of industrial goods companies should identify the optimal capital structure as well as
complying with the code of corporate governance in ensuring perfect mixture of board independence as some of
the companies are not abiding by the 50% mixture between the executive and non-executive directors in the
board.

Keywords: Board independence; capital structure; industrial goods; Nigeria and profitability.

1. INTRODUCTION absence of fund. The required fund may be for day to

day running or for business expansions. This
For any business to succeed, it requires fund to carry expresses how relevant fund is in the life of any
out its activities as no success is achievable in the business. This fund is referred to as capital. Capital is

_____________________________________________________________________________________________________

*Corresponding author: Email: Habib.abdulkarim@gmail.com, habib.abdulkarim123@gmail.com;

 Abdulkarim and Bahamman; JET, 6(1): 1-12, 2021

therefore refers to the means of funding a business. between the dependent and independent variable.
Capital of firms when sourced, it becomes a burden Also, to resolve the disagreement between the
on enterprises simply because it is other persons' variables in question. Baron RM et al. [14] have
resources which they are payable when benefits is suggested that a moderator variable can be employed
derived from it. It is therefore a symbol of a if there is an inconsistent relationship between
company's financial liabilities. There are two major criterion and predictor variable. Owing to the
sources available for businesses to willingly raised inconsistent results among the studies on capital
funds for their activities. These sources are internal structure and firm’s profitability around the world,
and external sources. The internal source refers to the this study introduced board independence as a
funds generated from within an enterprise which is moderator to examine the effect of the dependent
mostly retained earnings and the external sources variable on the independent variables.
which may be by increasing the number of co-owners
of a business or outright borrowing in form of loan. Board independence is a type of proxy used to assess
Therefore, capital structure is the debt-equity mix of the effectiveness of corporate governance by previous
business finance [1]. studies. The board should comprise an appropriate
combination of executive and non-executive directors
Financial Decisions are crucial, fundamental and to make sure no one dominates board decision
much important for any business in all around the making. In particular, non-executive directors can be
world. According to Bokpin GA et al. [2], financial considered as an independent non-executive director
decision about capital structure provides the clear if he or she can meet specific criteria [15]. The
direction to firm finances for overall operations and assumption is that if the board consists of a majority
growth to achieve the organizational goals by using of independent non-executive directors, it can monitor
numerous financial resources. Saeed MM, et al. [3] managers more effectively and therefore decrease the
declared that it is very hard to make a decision about agency costs [16].
capital structure of the firm. However, financial
managers are saddled with the responsibility of setting Capital structure represents a corporate governance
the best possible and optimal capital structure so as to device that can preserve corporate governance
maximize profitability and minimize the cost of efficiency and protect its ability to create value but is
investment. always ignored in the capital structure and
profitability studies. The key issue of this study is that
Profitability for any business cannot be far from the firms can finance from a mix of financing sources,
firm business performance. Profitability is seen as which can be either internal or external financing
proxy of financial performance, which is one of the sources. And this has direct effect on the firm’s ability
main objectives of company’s management [4]. The to generate profit as being and independent non-
performance of a firm has to do with how effectively executive directors would bring the desired degree of
and efficiently it is able to' achieve the set goals which objectivity that would sustains investors’ trust and
may be financial or operational. The financial confidence by representing a strong independent voice
performance of a firm relates to its motive to on the board [17]. The inconclusive results on the
maximize profit both to shareholders and on assets relationship between capital structure and profitability
while the operational performance is concerns with necessitate the introduction of moderator (board
growth and expansions in relations to sales and independence).
'market value [5]. Since capital is employed by firms
to achieve the firm's set goals, and performance is said The industrial goods sector in Nigeria comprises
to be the goals so set, both capital structure and firm companies primarily involved in the manufacture and
performance are therefore expected to be distribution of capital goods, including aerospace and
proportionally related and influenced one another. defence, engineering and building products, electrical
equipment, industrial machinery and packaging
Previous studies examines the relationship between products for industrial and consumer products (NSE,
capital structure and firm’s profitability and produced 2018). Industrial Goods companies in Nigeria like any
inconclusive results [6-13]. Capital structure was other across the globe required fund to boost their
identified as one of the main elements that influences activities in such a way that cost of capital would be
profitability. Capital structure decisions need to take minimised in order to maximise profitability. Firm
into consideration the interaction with other important With effective board independence and sound capital
variables that determine profitability. structure, makes it much easier for organizations to
obtain funds from investors, and thereby increases
Moderation is introduced to see whether the transparency and profitability [18]. The recent
moderator will strengthen or weaken the relationship recession (2016) in Nigeria adversely affected the

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performance of companies in the industrial goods preferred stock, to ascertain what capital mix the
sector and as the country exits the recession, the business organisation will adopt in financing its
government started making efforts to diversify the operations. Debt to Equity ratio measures financial
economy so as to provide shield against volatility in leverage of a company from accounting point of view,
oil prices as the Economy is supposedly highly stressing the ability of the firm to utilize either debt or
sensitive to shocks in the prices of oil (CBN, 2018). In equity in generating revenues (capital structure
effect, the performance of the industrial goods sector decision) while debt-to-assets ratio measures it from
recently shows marked improvement as the economy operational point of view, stressing how the acquired
strives to diversify. Capacity utilization in the debt/equity is utilized in assets (capital allocation
industrial goods sector in Nigeria was 60.5% in decision).
January, 2015 which dropped to 50.7% in July, 2016
and further came down to 48.5% in January, 2017. The liquidity of a firm’s equity is related to the ease
The rate of capacity utilization started growing and with which a firm can raise external capital through
closed the year 2017 with 54.5% (CBN, 2018). stock offering; less liquid stocks tend to have higher
Growth hit 0.8 percent in 2017 after contracting by issuance costs and thus a higher cost of equity. Besley
1.6 percent in 2016 (IMF, 2018). S et al. [22] assert the capital structure is measured by
comparing the total debt by total assets, which reflects
It is against this background that this study aimed at the size of the fund through debt either for current or
examines the moderating effect of board long term debt on the asset as a whole.
independence on the relationship between capital
structure and profitability of listed industrial goods Board independence is an important corporate
companies in Nigeria. governance mechanism that monitor the effectiveness
. of firm performance. Yermack D [15] argues that for
This study has significant practical importance as the the board to be able to supervise the actions of the
findings of the study will empirically and theoretically management and direct the company, it must be
suggest how board independence can moderate the independent. This can be achieved by having some
inconclusive deliberation on the relationship between members in the board who are not part of the
capital structure and firm profitability. So as priority management of the company (non-executive) and
should be given in corporation’s policy of decision have no relationship with other stakeholders. The
making and the best monitoring mechanism that experience and quality of board members can
should be taken into consideration by corporations. facilitate proficiency in controlling and guiding the
affairs of a company [23]. The main purpose of
2. LITERATURE REVIEW independent non-executive directors is to bring the
desired degree of objectivity that sustains investors’
This section reviews relevant literatures on capital trust and confidence by representing a strong
structure, board independence and profitability. independent voice on the board [17]. According to
Pandey IM [24] the directors or managers of a firm
2.1 Concept of Capital Structure, Board should work hard to achieve a capital structure that
would be beneficial to equity shareholders and others
Independence and Profitability like customers, employees, creditors and the society at
large. Board independence is measured as a
Capital structure embodies the way the firm finances Proportion of non-executive directors to the total
its operation via the combination of debt and equity directors on the board [25].
[19]. This form of corporate structure is very critical
and fundamental in the life of a business not only for Profitability on the other hand, according to the
profit maximization purpose, but also for business dictionary profitability which is measured by
sustainability and optimal attainment of the overall performance is the ability of a firm to create or
business objectives. Capital structure is referred to as produce net income on a regular basis. Ratio is used
the way in which a firm finances itself through debts, as a benchmark for assessing the profitability of a
equity and securities. It is the composition of debt and firm. Ratios help to summarise financial data and also
equity that is required for a firm to finance its assets. to make qualitative judgement about a firm’s
Capital structure is measured by ratios like debt to performance. Profitability is one of the major reasons
equity ratio, debt to total asset ratio, equity ratio of for the existence of business enterprises [26], and
total asset [20]. In addition, capital structure has been business enterprises continue their operation by
defined as the relationship between the various classes making profits. Return on equity measures how
of capital used by the firm in financing its operations profitable a firm is for the owner of the investment,
[21]. It is the interaction between the firm’s internal and how profitably a firm employ its equity. Likewise
reserve, the debt capital, the equity capital and return on assets is a key profitability ratio which

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measures the amount of profit made by a firm per for the analysis and their results reveal that in Nigeria,
Naira of its assets. It reveals the firms capacity to Long-term-debt was found to be a major determinant
generate profits before leverage. Returns on asset of a firm’s value while equity capital as a component
examines the how efficiently management uses firms of capital structure is irrelevant to the value of a firm.
assets to generate profit.
In contrast, Babaei Z et al. [29] used Pearson
2.2 Empirical Review on Capital Structure, correlation analysis technique to study the relationship
Board Independence and Firm’s between financial leverage and firm value. The study
analysed data obtained from annual reports of 153
Profitability
selected companies listed on Tehran Stock Exchange
(TSE) and the result shows that capital structure
The review of extant literatures related to this study significantly and negatively impacted on firm value in
aimed at providing empirical support and rationale for Iran. In another related study, Cuong NT [9]
each of the hypothesis developed in the study and it is investigates whether there is an optimal capital
also expected that the findings from the study could structure at which point firm is able to maximize its
align with some of the reviewed studies or provide a value. The study employed advanced panel threshold
divergent view. regression estimation developed by Hansen BE [30]
that indicates whether there is positive and negative
Chowdhury A et al. [27] examined the influence of impact of capital structure on firm value. The study
debt-equity structure on the value of shares given used book value of equity plus long- term debt (BVE)
different sizes, industries and growth opportunities and return on equity (ROE) as surrogate for firm
with the companies incorporated in Dhaka Stock value and book value of total debt to total assets
Exchange (DSE) and Chittagong Stock Exchange (TD/TA) as surrogate for capital structure and as the
(CSE) of Bangladesh. Correlation, fixed effects GLS threshold variable. The study concludes that the
regression analysis was carried out on the data. They relationship between capital structure and firm value
used EPS, dividend per share, dividend growth and has a nonlinear relationship and is represented by a
net current ratio as control variables. The study finds convex parabola shape.
significant and positive associations between capital
structure, EPS, dividend per share, dividend growth In another study, Esmail S et al. [31] investigated the
and current ratio and firm value. In another study, relationship between capital structure and value of
Aggarwal R et al. [6] investigate the relationship equities of firms listed in Tehran Stock Exchange.
between leverage and firm performance in the The base model used in the study is known as Myers-
international context, using Quantile regression Burgstahler-Dichev model. There is a significant
models. The findings of the study show that, while relationship between the ratio of book value to market
leverage is value-decreasing among high-growth value of equities, the rate of returns on assets and
firms globally, the value impact of leverage among changes in the capital structure of the firms under
low-growth firms varies across national institutional study. A positive significant relationship between the
conditions. ratio of debt to equity and P/E ratio was also noticed
in the study. Similarly, the study also found a positive
Antwi S et al. [7] study the impact of capital structure and significant correlation between the ratio of debt to
on firm value. The analysis was carried out on all 34 equity and Earnings before Interest and Taxes (EBIT).
companies listed on Ghana Stock Exchange (GSE) as In contrast, Feng-Li L et al. [32] examined the
at year ended 31st December 2010. The study relationship between capital structure and firm value,
employed Ordinary Least Squares (OLS) regression using panel regression method on data from 196
method in carrying out the analysis. The study Taiwanese listed companies for a period of thirteen
document that in an emerging economy like Ghana, years from 1993 to 2005. Adopting Tobin’s Q as
equity capital as a component of capital structure is proxy for firm value, they find that there are two
relevant to the value of a firm but Long-term-debt was threshold effects between debt ratio and firm value
found to be the major determinant of a firm’s value. and these are 9.86% and 33.33%. The study therefore,
This finding is contrary to Modigliani F et al. [28] concluded that there must be a threshold debt ratio of
proposition that capital structure is irrelevant in less than 33.33% at which point firm value stops
determining firm value. However, Antwi S et al. [7] increasing. Their results are consistent with the trade-
failed to carry out pre- and post-estimation tests which off theory, which suggests that there is a static amount
render their results/estimates invalid. In another study, of debt which prompts managers to find the ‘optimal
Ogbulu OM et al. [8] carried out analysis of a sample capital structure’ that maximizes firm value
of 124 companies quoted on the Nigerian Stock when the benefits of debt equal the marginal cost of
Exchange (NSE) for the year ended 31st December debt.
2007. The study employed OLS method of regression

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Adenuga AA et al. [10] evaluated the effect of were estimated using Probit model. Eight explanatory
financial leverage on firms’ value using sample of 5 variables of capital structure were used to measure
firms listed on the Nigerian Stock Exchange (NSE) their effect on firm value (measured by Modified
for a period of 6 years from 2007-2012. They sourced Tobin's Q). The results show that firm size, liquidity
data from annual reports of the selected firms and and leverage are negatively and significantly related
applied OLS statistical technique in their analysis. to firm value, whereas potential for growth, age of the
The study found positive and significant relationship firm, tangibility are positively and significantly
between financial leverage and firms’ value. They related to firm value. In effect, the results validate the
also concluded that financial leverage is a better predictions of trade-off theory in the case of
source of finance than equity to firms when there is tangibility. In contrast, Minh-Ha N et al. [36] also find
need to finance long-term projects. In the same vein, similar results. The study uses generalized least
Farooq MA et al. [33] investigate the effect of square method on 6-year data (2009-2014) generated
financial leverage on firm’s value in cement sector of from financial statements of 105 firms listed on Ho
Pakistan. By selecting the appropriate panel Chi Minh Stock Exchange, Vietnam. Among others,
econometric technique between fixed effects GLS and the results show that short-term debt is negatively
random effects GLS models, the association between related to firm value while the impact of long-term
financial leverage and firm’s value of all the 19 debt on the firm value is not statistically significant.
cement companies listed on the Karachi Stock Rather than establishing the nature of the relationship
Exchange during 2008-2012 was analysed. The between capital structure and firm value,
results show that financial leverage has positive and
statistically significant association with value of firm Demirgunes K [37] analysed the possible asymmetric
which was represented by Tobin’s Q. In contrast, causal relationship between capital structure and firm
Hadiwijaya T et al. [11] examine the effect of capital value by employing the asymmetric causality test of
structure and corporate governance on firm value. [38], on a time series data of Turkish manufacturing
They used data on banking firms listed on Indonesia industry (consisting of Borsa Istanbul listed
Stock Exchange (IDX) for period between 2010 and manufacturing firms) for the period of 1990 -2015.
2013 with total sample of 22 firms. The data was Test results from Granger causality test, which uses a
analysed using multiple regression analysis. In vector autoregressive (VAR) model, show that there is
consistency with Modigliani F et al. [28] postulation, a unidirectional asymmetric causal relationship
the results show that capital structure is not significant between capital structure and firm value, indicating
in determination of firm value; but corporate that capital structure Granger-cause firm value when
governance significantly affects firm value. shocks are negative, but not when shocks are positive.
More explicitly, a decrease in total debt ratio leads to
Rastogi S et al. [13] investigated whether high a decrease in the market-to-book value ratio.
financial leverage has significant and positive impact Considering the effect of only negative shock, the
on firm’s value. The data set was analysed using empirical findings of the study supported partial
descriptive statistics; correlation and multiple evidence to the validity of trade-off theory which
regression analysis. The study observes that debt ratio predicts a positive relationship between debt level and
has a low degree of positive correlation with firm firm value.
value, whereas debt to equity ratio has a negative
relationship with firm value. In contrast, Aggarwal D Moreover, studies on Board independence shows that
et al. [34] investigate the effect of capital structure an independent non-executive director plays a vital
and firm quality on firm value of selected Bombay role in dealing with agency problem [39-42]. Firms
Stock Exchange listed hospitality firms, using data with a high percentage of non-executive directors are
extracted from the annual reports of the firms from regarded as following good corporate governance
2001 to 2015. Pooled OLS, GLS fixed effects and practice and they are having a positive impact on firm
GLS random effects models were employed. The performance [43].
findings of the study reveal a significant positive
relationship between firm value and leverage, firm However, most prior empirical studies do not find a
quality, size and economic growth. significant positive relationship between board
independence and firm performance [44,45,42] also
In another study, Ibrahim M [35] empirically analysed find no significant correlation between board
capital structure determinants in Nigerian independence and firm financial performance
manufacturing industry for a period of five years measured by Return on Equity (ROE) for a sample of
between 2012 and 2016. The study used data 266 U.S. firms between 1970 and 1980. While,
collected from the Nigerian Stock Exchange (NSE) Hassan SU et al. [46] documented that Board
fact book. The conditional probability model analyses Composition is positive, strongly and significantly

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influencing the Performance of listed Deposit Money the debt or the principal when it’s due. It also might
Banks in Nigeria. cause in the inability to generate profit in a certain
financial year that may result in failing to pay
Based on the literature reviewed, there is clear dividends to firm shareholders [47].
evidence that relationships exists between capital
structure and firm profitability. Even though the 3. RESEARCH METHODOLOGY
debate is ongoing, no conclusion is drawn on the
nature of relationship between capital structure and This study is conducted based on historical data,
firm’s profitability. This study attempts to extend covering the period from 2006 to 2018. This period is
knowledge by introducing a moderator variables to considered long enough to provide sufficient data to
interact. However, most of the existing literature assist in estimating a reliable regression models for
investigates direct relationship among these variables. the study. This makes the Ex-post facto design
If an investigation on the causal relationship is being suitable for the study. The design is believe to be
conducted, it only considers the relationship between adequate and appropriate for the assessment of
two of these variables at a time, ignoring the moderating effect of board independence on the
interaction that might exists between them. As it relationship between capital structure and profitability
becomes apparent that capital structure, board of listed industrial goods companies in Nigeria.
independence and firm profitability are interrelated;
this study plans to fill the gap by directly investigating The population of the study consists of all the listed
the moderating effect of board independence on the industrial goods companies in Nigerian Stock
direct relationships between capital structure and firm Exchange as per NSE Daily Listing, 2018.
profitability. The following hypotheses were
formulated in a null form to guide the study: However, availability of relevant data is very
important for studies of this nature. The census
H01: Capital structure significantly affects firm’s sampling technique was used in which all the
profitability of listed industrial goods companies in elements of the population are considered.
Nigeria. Consequently, for any company in to qualify as part
of the sample size, the company must satisfy the
H02: Board independence significantly influences
following: (1) it must be listed throughout the entire
firm’s profitability of listed industrial goods
period of the study and (2) it must be active within the
companies in Nigeria.
study period and must have the required data for the
H03: Board independence significantly moderates the study. The first selection criterion is used to ensure
relationship between capital structure and firm’s complete coverage of the data of a company for the
profitability of listed industrial goods companies in entire period of the study and to satisfy the minimum
Nigeria. requirements of a longitudinal study [48]. The second
selection criterion is used avoid missing values or
2.3 Theoretical Framework incomplete data. Upon applying the filters for the
selection of sample size, the research therefore arrived
Quite a number of theoretical frameworks have been at a sample size of ten companies.
proposed in the finance literature to provide Adopting census sampling technique, the whole 10
clarification for firms’ capital structure decisions. companies that remained after the filtering were used
Theories such as the capital structure irrelevance as sample size for this study. This is because
theory of [28], Trade off theory, Pecking Order considering the number of companies and number of
Theory, Market Timing Theory and Signalling theory. years for the study, adopting other methods of
However, this study consider free cash flow theory as probability sampling could lead to much less data
the theory that underpins this study because free cash which could adversely affect the reliability of the
flow theory of capital structure innovated by Jensen results of the study. Secondary data source was used
MC [47], posit that leverage itself can also act as a for this study as data for the study was generated from
Corporate governance device and thereby reduces the the annual reports and accounts of the sampled
agency problem (hence increasing firm profitability), companies listed in the Nigerian Industrial
by reducing the agency costs of free cash flow. There goods sector from 1st January, 2006 to 31st December
are some consequences derived if firm is employing 2018.
higher leverage level. Managers of such firm will not
be able to invest in non-profitable new projects, as This study used three set of variables: dependent,
doing so the new projects might not be able to explanatory (consisting of independent and control
generate cash flows to the firm, hence managers variables) and moderating variables as shown in Table
might fail in paying the fixed amount of interest on 1.

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Table 1. Variables and their measurement

Variables Description and measurement

Dependent Variable
Return on Equity (ROE) Ratio of net profit after tax to total equity
Independent Variables
Debt To Equity Ratio (DTE) Ratio of total debt to total equity
Moderating Variable Proportion of non-executive directors to the total directors on the board
Board Independence (BI)
Control variables:
Firm Size (FSIZE) Log of total assets
Sales Growth (SG) change in sales within the year divided by sales at beginning of the year
Source: Generated by the Researcher

In analysing the moderating effect of board minimum of -0.7.079 to a maximum 5.915. This
independence on the relationship between capital shows that on average, the sampled industrial goods
structure and profitability of listed industrial goods companies of Nigeria during the period 2006-2018
companies in Nigeria, Descriptive statistics, were able to generate ROE of 14.8%. The minimum
correlation, as well as ordinary least square (OLS) value is an indication that some companies reported
regression were utilized as tools of analysis after loss during the period, while the maximum profit
robustness tests are carried out on the data as used by during the period stood at 5.915. The standard
Farooq MA et al. [33], Demirgunes K [37], Lawal AI, deviation of 0.971 signifies that there is much
[19] and Kurawa JM et al. [49] disparity from the mean value and that the
data deviate from the mean value from both side by
Based on the formulated hypotheses of this study 97.1%.
therefore, the general models based on the variables
of the study are stated thus: Furthermore, the statistics show that capital structure
proxy by the DTE has a mean of -0.91 with a standard
ROEit= β0+ β1DTEit+β2FSIZEit+β4SGit +εit (I) deviation of 22.703, and the minimum and maximum
of -253.828 and 23.523 respectively. This shows that
ROEit= β0+β1BIit+β2FSIZEit+β4SGit +εit (II) the values are not centred on the mean value. That is
there is much dispersion away from the mean because
ROEit= β0+ β1DTEit +β2BIit + the standard deviation is greater than the mean. The
β3DTEit*BIit+β4FSIZEit+β6SGit +εit (III) deviation of 22.7 is an indication that there is much
dispersion around the average financing.
Where:
The BI indicates, on average, that 53% of board
ROEit is proxy for firm profitability of firm i at year t members are non-executive directors. Some
DTE = Debt-to-Equity ratio companies has up to 89% proportion of non-executive
BI= Board Independence members on their board while others with the least
FSIZE = Firm Size proportion of non-executive directors of 10%. Which
SG= Sales Growth also contradicted the provision of code of
β0, β1… β8 are the regression model coefficients of the corporate governance which asserts that the majority
explanatory variables while εi’s are the random errors. of the board members must be non-executive
directors.
4. RESULTS AND DISCUSSION
4.1 Robustness Test and Regression
Table 2 presents the result of the descriptive statistics Assumptions
of the variables where the minimum, maximum, mean
and standard deviations of the data are fully captured. The robustness test is conducted in order to ensure the
The total numbers of observations for every variable validity of all statistical inferences for the study As
are 130 derived from thirteen years data of ten mentioned earlier, for a regression results to be
sampled listed industrial goods companies in Nigerian accurate, valid and relied upon, the results obtained
stock exchange as at 31st December 2018. must satisfied all regression assumptions. To attain
this, the following tests were carried out to ensure
From Table 1, the ROE (profitability)) has a mean of robustness normality, multicollinearity, and
0.148 (14.8%). The range of the ROE is from the hetroskedasticity [50].

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Table 2 Descriptive statistics of the variables

Variables OBS Mean Std. Dev. Min Max

ROE 130 0.148 0.971 -7.079 5.915
DTE 130 -0.91 22.703 -253.828 23.523
BI 130 0.531 0.188 0.1 0.89
DTE*BI 130 -8.039 91.624 -1041.02 9.48
FSIZE 130 6.633 0.820 5.09 8.76
SG 130 8.843 20.430 -61.96 108.35
Source: STATA Output 14.0 based on data collected (2006-2018)

Normality Test was conducted to check for data coefficient of determination (R2), t-statistics and F-
distribution patterns of the research data and Normal statistics of the study. While a P-value of greater than
Probability Plot was used for the purpose, the result 5% indicates absence of hetroskedasticity and
indicates a good fit and does not suggest the presence existence of homoskedasticity meaning that variance
of outliers among the regression standardized of the error term is constant for all values of
residuals. In other words, the points on the plot do not independent variable [49]. The result of Breusch-
appear to deviate significantly from the line of best fit Pagan/Cook-Weisberg test for hetroskedasticity
indicating that the normality assumption is valid. reveals that errors have constant variance (Non-
heteroskedastic), which indicates that the OLS
Multicollinearity tests assist in checking the validity estimators will have the minimum variance of all
of the study model. Multicollinearity is a statistical unbiased estimators, and also the P-values will be
marvel in which two or more independent variables in reliable. This is evidenced by the insignificant
a Multiple Regression Model are highly interrelated probability (p-value) of the chi square of 0.3336. This
which is capable of misleading the outcome of the signifies absence of hetroskedasticity and existence of
study. Therefore, the commonly used technique in homoskedasticity in the model.
determining the presence of multicollinearity is
Variance Inflation Factor (VIF). The rule is that VIF The Correlation Matrix Table 3 shows the relationship
of more than 10 indicates the presences of between all pairs of variables in the Regression
Multicollinearity [50,49]. The result from the Model; the relationship between all explanatory
Regression Models showed that the Variance Inflation variables, explained variable and the relationship
Factor (VIF) of the models is less than 10 ranging between all the independent variables. The values of
from 1.04 – 1.45 which indicates absence of the correlation coefficient range from -1 to 1. The sign
Multicollinearity. of the correlation coefficient indicates the direction of
the relationship (positive or negative), the absolute
Hetroskedasticity test was carried out, so as to know values of the correlation coefficient indicates the
whether the variability is constant or not. The test is strength, with larger values indicating stronger
necessary to ensure that the regression fits all the relationships. The correlation coefficients on the main
values of the independent variables and this is diagonal are 1.0000.
possible only if the error terms do not vary with the
independent variable and therefore are random in From the Table 3, it is clear that the correlation
nature. A significant P-value of less than 5% signifies coefficient between dependent variable and
presence of hetroskedasticity meaning that the independent variables are all positive
variation of the term errors is not constant which except for FSIZE and SG that shows an inverse
would affect inferences in respect of beta coefficient, relationship.

Table 3 Correlation results

Variables ROE DTE BI DTE*BI FSIZE SG

ROE 1
DTE 0.5626 1
BI 0.0512 0.1068 1
FSIZE -0.0100 0.1450 -0.0056 0.1490 1
SG -0.0280 -0.0849 -0.0779 -0.0970 0.2720 1
Source: Computed using Stata 14.0 from Annual Reports and Accounts of the sampled firms

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 Abdulkarim and Bahamman; JET, 6(1): 1-12, 2021

Table 4. Regression results

Variables Model I Model II Model III

coef. p>/t/ coef. p>/t/ coef. p>/t/
DTE 0.0249 0.000 0.1381 0.000
BI -0.1199 0.760 0.4117 0.289
DTE*BI -0.3377 0.001
FSIZE -0.1282 0.163 -0.1281 0.174 -0.0988 0.264
SG 0.0024 0.507 0.0025 0.495 0.0074 0.834
Cons 0.9993 0.099 0.0485 0.114 0.6905 0.266
R-squared 0.3275 0.2981 0.3892
Adj R-squared 0.3114 0.2757 0.3646
F value 20.45 13.27 15.80
Prob>F 0.0000 0.0000 0.000
Source: Computed using Stata 14.0 from Annual Reports and Accounts of the sampled firms

Table 5 shows the summary regression result of all of 13.27 and p- value of 0.0000 which indicates that it
the three study model with the aim of assessing the is statistically significance.
moderating effect of board independence on the
relationship between capital structure and firm’s In estimating Model III which is the main objective of
profitability. the study, regression result was displayed in Table 4.
Its shows a value of R2 of 0.3892, F-statistics of 15.80
In appraising Model I, which is one of the specific and p- value of 0.0000 proven that the model is fit.
objective of the study, regression results of the From Table 4, it can be gathered that that capital
dependent variable (ROE) and the independent structure proxy by debt to equity ratio (DTE) has a
variables capital structure proxy by (DTE) are positive and significant effect on firm profitability of
presented in Table 4. The OLS regression listed industrial goods companies in Nigeria (coef.=
results reveal the cumulative R2 of 0.3275 0.1320). This is consistent with the findings of
which is the multiple coefficient of determination that Igbinovia EL et al. [51] and Aggarwal D et al. [34]
gives the proportion or percentage of the total who found that capital structure has a positive impact
variation in the dependent variable explained by the on firm value. The result of this study contradicts the
explanatory variables in the model. Hence, it findings of Ibrahim M [35] and Ibrahim and Isiaka
signifies that 32% of the total variations in ROE of (2020), who found that capital structure has a negative
listed industrial goods companies in Nigeria are impact on firm value. As a result of these
caused by independent variables. The remaining contradictions among scholars, a moderating variable
68% of the total variation in the ROE was is introduced to validate the relationship. Board
caused by factors not explained by the model. It independence was introduced and the result shows
indicates that the model is fit. This can be confirmed that when DTE is moderated by BI (DTE*BI), a
by the value of F-statistics of 20.45 and p- value of negative significant effect was established (coef.= -
0.0000 which indicates that it is statistically 0.3377 and P>/t/= 0.001). This implies that DTE*BI
significance. has a significant negative impact on profitability of
listed industrial goods companies in Nigeria at 1%
In evaluating Model II, which is the second specific significant level. This also implies that the higher the
objective of the study, regression results of the debt to equity ratio the lower the performance of the
dependent variable (ROE) and the independent companies in term of return on equity (ROE). The
variables are presented in Table 4. The OLS beta coefficient indicates that 1% increase of DTE*BI
regression results expose the cumulative R2 of 0.2981 can result to fall in profitability by 33.77%. This
which is the multiple coefficient of determination that provides evidence to accept the null hypothesis earlier
gives the proportion of the total variation in the formulated, which states that BI significantly
dependent variable explained by the explanatory moderates the relationship between capital structure
variables in the model. Hence, it signifies that 29.81% and profitability of listed industrial goods companies
of the total variations in ROE of listed industrial in Nigeria. The finding is in line with those of
goods companies in Nigerian are caused by Ebaid IE [52], Saeed MM, et al [3] and Chechet IL et
independent variables. The remaining 70.19% of the al. [5].
total variation in the ROE was caused by factors not
explained by the model. It indicates that the model is Firm size (FSIZE) and sales growth (SG) were
fit. This can be confirmed by the value of F-statistics introduced in the model to control for performance

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