Thin Capitalization and Firm’s Financial Performance: Are Older Firms at an Advantage?

Abstract

This study examined effect of thin capitalization on the financial performance of listed multinational firms in Nigeria for a period of 18 years (2006 to 2023). The Specific objectives were to: examine the effect of debt-to-equity ratio(DER) on return on capital employed(ROCE) of multinational corporations in Nigeria, ascertain the effect of Interest cover ratio (ICR) on return on capital employed of multinational corporations in Nigeria, evaluate the effect of Debt-to-asset ratio(DTA) on return on capital employed of multinational corporations in Nigeria, determine the moderating effect of firm age on the relationship between thin capitalization and financial performance of multinational corporations in Nigeria.  Ex-post facto research design was adopted. The study used secondary sources of data from financial statements of the selected companies under study. The population of the study consisted of all 19 multinational firms listed on the Nigerian Exchange Group as at December 2023.The sampling technique used for this study was the purposive non probability sampling technique, 16 firms which represents approximately 85%of the entire population were used as the sample size, the other 3 firms were dropped based on data unavailability, while the analytical technique used for the study was panel least square regression model. Results of the study shows that the predictor variables examined (DAR, ICR) except (DER) have no significant effect on the financial performance of MNCs in Nigeria measured by (ROCE). Lastly, firm age moderates the relationship between DER and DAR as proxies of thin capitalization and ROCE as a measure of financial performance. The study concluded that thin capitalization has a negative significant effect on the performance of listed multinational firms in Nigeria and recommends amongst others that management of multinational companies in Nigeria should not contract excessive debt from affiliates as the interest payments may not significantly reduce their tax liabilities or positively enhance performance. Also, older firms are more at an advantage if they engage in thin capitalization practices as against younger firms.