LIQUIDITY AND CAPITAL STRUCTURE DECISIONS OF LISTED DEPOSIT MONEY BANKS IN NIGERIA

Abstract

In determining appropriate financing mix, managers must apply caution in ensuring that
liquidityis considered so as to minimise cost and maximise profitability for their banks. Against
this backdrop, this study examines the impact of liquidity on the capital structure of listed
Deposit Money Banks (DMBs) in Nigeria from 2006 to 2019. The study employs secondary data
obtained from the 13 sampled quoted DMBs’ Annual Accounts. Granger non-causality and
dynamic Generalized Methods of Moment (GMM)estimationsare used to analyse the relationship
between liquidity ratio and the capital ratio. The regression result shows that loans to deposit
ratio, proxy for bank liquidity has significant and positive impact on the equity capital ratio of
DMBs. In addition, there is a bi-directional causality link between liquidity ratio and capital
structure of Nigeria banks. The paper concludes that the liquidity ratio has a significant impact
on the financing decisions of the Nigerian DMBs. Hence, the study recommends that banks
should try to maintain sufficient liquid funds and assets above mandatory liquidity requirement,
to enable them meet the immediate demand of their depositors and borrowers as well as reduce
their financial risk position when designing an optimum capital structure.