THE EFFECT OF COST OF CAPITAL ON FIRM PERFORMANCE OF LISTED CONSTRUCTION FIRMS IN NIGERIA

By

Peters, George Tamunotonye¹

Department of Accountancy, Faculty of Management Sciences,

Rivers State University, Port Harcourt, Nigeria.

peters.george@ust.edu.ng

+234-806 4810 451

Imo, ThankGod Obutor²

Department of Accountancy, Faculty of Management Sciences,

Rivers State University, Port Harcourt, Nigeria.

thankgod.imo@ust.edu.ng

+234-7069536 993

ABSTRACT

The study investigates the effect of cost of capital on firm performance in Nigeria by employing samples from listed construction firms in Nigeria between the periods of 2012-2021. In this study, cost of debt and cost of equity are the cost of capital proxies employed to examine their effect on firm performance. Firm performance is measured in terms of return on asset. Furthermore, to control the model’s goodness of fit, the study employed the variable of earnings per share in line with related extant literature. The researchers conducted pool least square regression before proceeding to check for inconsistencies with the basic assumptions of the OLS regression. Succinctly, these diagnostics tests included test for multicollinearity as well as test for heteroscedasticity. Specifically, to examine the cause-effect relationships between the dependent variables and independent variables as well as to test the formulated hypotheses, the researchers used an OLS regression analysis since the results reveal the absence of heteroskedasticity. The results of the study showed that cost of debt has an insignificant negative effect on firm performance while cost of equity has an insignificant positive effect on firm performance proxied by return on asset of listed construction firms during the period under investigation. Specifically, the researcher concluded that while the cost of debt insignificantly reduces firm performance, cost of equity insignificantly improves performance of listed construction companies in Nigeria. Based on the results of the study, it would be ideal to advice any corporate manager of construction company in Nigeria to make concerted effort in obtaining equity capital given that it has positive significant effect on firms’ performance. However, with regards to debt capital, it is not advisable for the corporate entities to seek for such finances due to the negative effect it has on firms’ performance, even though the effect is insignificant.

KEYWORDS:           Cost of Debt, Cost of Equity, Financial Performance, Pool OLS Regression

1.0       Introduction

Capital consists of two components; one is debt and other is equity. If a firm finances its operation with debt, it is borrowing money from a lender for a certain period of time with a promise to pay the money back with its interest. In return the lender receives interest payments on the loan. With equity financing the shareholders buy shares in the company, they become owners and in return they receive a portion of the firm’s profit. Cost of capital (COC) in general represents the different costs attached to the different sources of financing obtained by an organization. The cost of capital is a history of the costs arising from the capital structure, i.e. the mix of debt and equity. Thus, optimal capital structure is synonymous with optimal COC.

The problem of how firms choose and adjust their strategic mix of securities has called for a great deal of attention and debate among corporate financial literature. The interest is due to the fact that the mix of funds (Leverage ratio) affects the cost and availability of capital and thus, firm’s investment decisions. Initially, at the time of its promotion, a company will have to plan its capital structure and subsequently, whenever funds have to be raised to finance investment, a capital structure decision is involved (Salawu, 2007). It is clear that capital structure is a significant management decision as it greatly influences the owner’s equity return, his risks as well as the market value of the shares. It is therefore incumbent on the management of a company to develop an appropriate capital structure, which is most suitable to the company’s operation. Thus, capital structure and firm profitability are all strongly linked in explaining how economic agents form and modify their asset-acquisition behavior through firms and capital markets.

Sound capital structure will have effects on profitability and long-term value of the firm for shareholders. Firm performance and capital structure has succeeded in attracting a good deal of public interest because it is a tool for socio-economic development. The choice between debt and equity for a business firm has implications on the value of a firm as well as strategic importance for corporate managers (Brealey et al, 2006 and Ross et al 2008, and Bodie et al 2009). Corporations’ capital structure mainly depends upon the size and composition of debt or equity well-known as hybrid financing that is then used by firms to be operational (Brealey et al, 2006). Capital structure decision is a vital one since the profitability of an enterprise is directly affected by such decision. The successful selection and use of capital is one of the key elements of the firms’ financial strategy (Kajananthan, 2012; Velnampy and Aloy Niresh, 2012). Profitability should be re-invested into the business for its’ survival (Velnampy, 2006), where profitability is the most prominent target issue and the ultimate goal for any firm is to maximize profitability. However, too much attention paid to profitability, which may lead the firm into a pitfall by diluting the liquidity position of the organization.

Since  cost of capital (COC)  vary  depending  on  the  sources  of financing  and  the  degree  of  risk  associated  with  them,  financial  managers  try  to  choose  a  capital structure pattern  that  minimizes  COC  and maximizes  the  return  of  the company  (Rahman,  Sarker  & Uddin,  2019).  Therefore,  the  investment  of  a  firm  is  considered  important  only  when  the  expected return on  capital is  higher than  the COC.  This is  because a  company should  earn  as  much  profit  as possible to convince its shareholders, which leads to higher enterprise value (Nadya, Semuel & Devie, 2019).  Therefore,  it  is  necessary  to  recognize  COC  as an  important  variable  that  affects  firm performance (Alrjoub & Ahmad, 2017).  However, the valuation of the Nigerian capital market, which is a  way  of  raising  long-term resources to  finance  long-term  ventures,  is  underdeveloped  compared  to  its  foreign  counterparts  (Luckey  & Akani,  2018).  Therefore,  the primary  responsibility  of  efficiently  raising capital  or  mobilizing  funds from the surplus units of the economy and successfully channeling them to the deficit sector  to meet its  long-term  capital  needs  has not  been  prudently  discharged.  For  instance,  the  Nigerian  capital market is very illiquid, there are few listed companies with low volume of transactions and low market capitalization, leading to increase in COC (Luckey & Akani, 2018). Despite the growing literature, the relationship  between  COC  and  financial  performance  remains  a  knowledge  gap  as  most  existing studies focus  on  foreign countries (Shahzad  & Al-Swidi,  213;  Ivascu &  Barbutu-Misu,  2017; Lucky, 2017;  Sumaryati  &  Tristiarini,  2017;  Omwanza,  2018;  Nadya  et  al., 2019)  and  few  have  been conducted  in  Nigeria  (Ibrahim  &  Ibrahim,  2015;  Lucky,  2017;  Lucky  &  Akani,  2018;  Akintoyee, Adegbie, Askhia &  Akintola,  2019; Sam, 2019). Therefore, this study  investigated the effect of cost of capital on firm performance in Nigeria.

2.0       Literature and Hypotheses Development

Firm Performance

Firm financial performance is generally defined as a measure of the extent to which a firm uses its assets to run the business activities to revenues. It examines the overall financial health of a business over a given period and can be used to contract the performance of identical firms in similar industries or between industries in general (Atrill et al. 2009). The main source of data for determining firm financial performance is the financial statement, the product of accounting which consists of the balance sheet which shows the assets liabilities and equities of a business, the income statement that records the revenues, expenses and profits in a particular period, the cash flow statement which exhibits the sources and uses of ash in period, and the statement of changes in the owners’ equity that represents the changes in owner’s wealth. Firm financial performance is commonly reflected in the calculation of financial ratios that show the link between numbers in the financial statement. The financial ratios may include the computation of the profitability, efficiency, liquidity, gearing, and investment of a particular firm. 

Cost of Capital

Capital consists of two components; one is debt and other is equity. If a firm finances its operation with debt, it is borrowing money from a lender for a certain period of time with a promise to pay the money back with its interest. In return the lender receives interest payments on the loan. With equity financing the shareholders buy shares in the company, they become owners and in return they receive a portion of the firm’s profit. Cost of capital in general represents the different costs attached to the different sources of financing obtained by an organization. The cost of capital is a history of the costs arising from the capital structure, i.e. the mix of debt and equity. Thus, optimal capital structure is synonymous with optimal COC. In economics, these two terms are inseparable as they have the same objective. A good combination of capital structure that minimizes COC (returns on debt and equity) and maximizes the value of the firm is the goal of every firm. A company’s investment is considered valuable only when the predictable return on capital is higher than the cost of capital. The logic behind this is that a company should earn maximum profits to satisfy its shareholders, which leads to an increase in the value of the company. The appropriate level of cost of capital is one of the most critical issues that many financial experts try to identify (Abdul-Sattar, 2015; Mohamad & Saad, 2012). The term COC attracted much attention with the work of Modigliani and Miller (1958) on capital structure, referred to as Modigliani and Miller (1958) theory (M&M theory). The theory presented a consistent model that dealt with capital structure in a scientific layout where WACC is used as a discount rate to determine the value of the firm and shows that the COC for a firm are the weighted CODC and COEC.

Cost of Debt

The company could raise debt in a variety of ways which included borrowing funds from financial institutions or from public debt in the form of bonds (debentures) for a specified period of time at a certain interest rate (Wakida, 2011). The company can use various bonds, loans, and other forms of debt, so this measure is useful for giving an idea as to the overall rate being paid by the company to use debt financing. The measure can also give investors an idea as to the riskiness of the company compared to others, because riskier companies generally have a higher cost of debt. Lenders are relatively demand lower returns because they take the least risk of any contributors of long-term capital, so the cost of debt is lower than the cost of other forms of financing. Also, the tax deductibility of interest payments lowers the debt cost to the firm substantially. An optimal debt to-equity ratio would not only decrease capital costs, but they would also achieve a lower weighted average cost of capital (WACC). Debt holders are also aware of the possibility of wealth transfer to the equity holders and impose restrictions on firms through debt covenants. In contradiction to equity holders, once a covenant has been agreed upon, debt holder will have great difficulty influencing firms’ operations. Equity holders on the other hand, seem to appreciate a healthy capital structure and adopt guidelines in corporate statues (Wald, 1999). Equity holders are aware of the payout advantage that debt holders possess. However, debt confers advantages to equity holders. When taxes are included in an M&M theorem, a firm increases its value by attracting debt. Greater firm value increases equity holder’s value. Empirical research shows that firms with a lower debt-to-equity ratio are more profitable and have a respectively greater return on equity. In addition, those firms with a greater credit rating and a lower cost of capital (Francis, LaFond, Olsson, & Schipper, 2018).

Cost of Equity

When investors provide equity capital to the firm, they acquire a right to the future dividends of that firm given that they become partial owners of the company and that these dividends cannot be determined from the onset (Wakida, 2011). Businesses have an option of raising capital internally by retaining earnings. The opportunity cost of retained earnings is the rate of return on dividend forgone by equity holders and the cost of external equity is the minimum rate of return which the shareholders require on funds supplied by them by purchasing new shares to prevent a decline in the existing market price of the equity share (Wakida, 2011). Unlike debt capital, which the firm must eventually repay, equity capital remains invested in the firm indefinitely—it has no maturity date. The two basic sources of equity capital are (1) preferred stock and (2) common stock equity, which includes common stock and retained earnings. Common stock is typically the most expensive form of equity, followed by retained earnings and then preferred stock. In addition, a firm that increases its use of leverage significantly can see its cost of debt rise as lenders begin to worry about the firm’s ability to repay its debts. According to Gitman & Zutter (2012), whether the firm borrows very little or a great deal, it is always true that the claims of common stockholders are riskier than those of lenders, so the cost of equity always exceeds the cost of debt.

Cost of Capital and Firm Performance

An extensive literature review on the relationship between cost of capital and financial performance of firms both in Nigeria and other countries was carried out and the findings were mixed and contradictory. This could be attributed to many reasons including the type of variables used, sample size, period covered by the study, sectors used, different countries and methods used. Several scholars such as Ivascu and Barbutu-Misu (2017); Sumaryati and Tristiarini (2017); Omwanza (2018) and Akintoye et al. (2019) document a significant and positive impact of COC on firm’s financial performance. These studies reasoned that corporate backer expect the required return on their investments (also referred to as COC), and in return, they expect the firms to deliver this expected return. Moreover, they based their argument on the modified M&M theory of 1963, which postulates that when a firm’s debt increases, its financial performance also increases due to the tax deductibility of fixed interest costs. In contrast, some scholars such as Abdul-Sattar (2015); Zheng, Rahman, Begum and Ashraf (2017) and Nadya et al. (2019) found negative and significant impact of COC on financial performance. This implies that the firm’s value increases when the firm’s COC decreases. The negative impact is due to the known preference order among financing sources. Firms prefer to finance new investments in a certain hierarchical order: internal funds first, debt issuance second, and new stock issuance last (Myers, 1984; Myers & Majluf, 1984). Moreover, only profitable firms have the ability to finance new investments from retained earnings and not through the issuance of new debt and/or equity. However, some scholars such as Apergis, Artikis, Eleftheriou and Sorros (2012), Al-Tamimi and Obeidat (2013), and Ibrahim and Ibrahim (2015) do not prove any significant impact of COC on financial performance. The results of these studies supported the 1958 M&M theory, which states that the decision between debt and equity costs does not have a significant impact on a firm’s reputation and value when capital markets are perfect. Given the different results on the impact of COC on financial performance reported in previous studies, these contrasting effects suggest that a firm’s COC may be associated with either lower or higher financial performance. Hence, the following hypotheses are stated;

H0₁:     Cost of debt has no significant effect on the performance of listed construction companies in Nigeria.

H0₂:     Cost of equity has no significant effect on the performance of listed construction companies in Nigeria.

Theoretical Framework

Trade-Off Theory

Trade-off theory affirms that optimal debt ratio is estimated by balancing the benefits (i. e. interest tax shield) and weaknesses (i. e. cost of financial distress) of debt finance. While leverage rises, the marginal tax shield from each currency unit of extra debt plunges. It is due to the high likelihood that the corporations would be exempt from tax payments because of not having positive taxable incomes. Therefore, the trade-off theory refuted the irrelevance theory of Modigliani and Miller (1958) that capital structure does not matter for firm value. The theory relaxed the MM (1958) perfect market assumptions that firms do not pay taxes, no transaction costs, symmetric of information among others. The trade–off theory posits that firms behave as if they have optimal debt position, they strive to achieve. They tend to trade off the tax advantage of using debt with the agency cost and bankruptcy cost that may arise due to the use of debt in their capital structure. In the Trade-Off theoretical framework, companies identify their optimal capital structure and weigh up the advantages and disadvantages of an additional monetary unit of debt. Among the advantages, we can include costs that are ‘fiscally deductible’ from company tax because of paying interests (Modigliani and Miller, 1963; DeAngelo and Masulis, 1980); and a lessening of the free cash flow problem (Jensen, 1986; Stulz, 1990). The disadvantages of debt include the potential costs resulting from financial distress (Kraus and Litzenberger, 1973; Kim, 1978), and the agency costs arising between owners and financial creditors (Jensen and Meckling, 1976; Myers, 1977). At the optimal point for the company capital structure, the benefits and shortcomings of debt are balanced, hence, achieving equilibrium. Myers (1984) showed that the trade-off approach implied that the rate of real company indebtedness reverts to a target, or optimal level.

Empirical Review

Marietza, Julianti, Aprila, Hatta, and Baihaqi (2021) provide empirical evidence on the effect of corporate social responsibility disclosure on the cost of capital of BUMN companies listed on the Indonesia Stock Exchange with an observation period from 2013-2017. The measurement of corporate social responsibility disclosure using Global Reporting Initiative G4 (GRI-G4). The cost of capital is divided into 2 namely the cost of equity using the Easton 2004 Model and the cost of debt using the Francis and Periera Model 2005. The sample selections method is the purposive sampling method which totals 13 samples with 65 observations. The results of the ordinary least square regression analysis showed that the disclosure of corporate social responsibility has an influence on the cost of equity. Meanwhile, the disclosure of corporate social responsibility has no effect on the cost of debt.

Mohamad and Saad (2012) examine the effects of cost of capital using the weighted-average cost of capital (WACC) approach with firm value and profitability from the viewpoints of listed companies in Bursa Malaysia. The study employed two model specifications in order to test the postulated hypotheses, using cost of capital measure of WACC along with other independent variables for 415 listed companies for the period of 2005 until 2010. On the basis of findings for the research, it concluded that there are significant relations between cost of capital with firm’s value and profitability for listed companies in Malaysia. The result of the study shows significant relationships exist between cost of capital with firm value and profitability.

Cajias, Fuerst, and Bienert (2012) investigates the effect of corporate social responsibility (CSR) ratings on the ex-ante cost of capital of more than 2300 listed US companies in a panel from 2003 to 2010. It examines if financial markets value continuous investment in corporate social responsibility activities through higher market capitalization and lower cost of capital. They show that firms´ sustainability strategy varies across industry sectors, whereas customer-orientated companies like telecommunications or automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, they predict a positive effect for one standard deviation of firms´ intensive allocation of resources in sustainable activities. In addition, by improving their CSR ratings a company may get access to additional resources, ranging from the growing ethical investment industry to that part of the labor force for whom CSR performance matters when choosing an employer.

Chen, Lee, and Hung (2019) explores the association with corporate social responsibility, ex-ante cost of equity capital, and operating performance forecasting with analysts. To achieve the objectives of the study, the authors separated the study period into introductory period and maturity period for the analysis. The panel regression results shows that sound corporate social responsibility policy, more information transparency of CSR, and creating interaction with stakeholders are reduced ex-ante cost of equity capital to increase operating performance, and analysts give more positive forecast or better evaluation. On the other hand, they also find that the engagement on CSR is motivational factors in introductory period to become the hygiene factors on firms’ management in maturity period.

Salvi, Petruzzella, and Giakoumelou (2018) analyze the relationship between corporate social responsibility and cost of equity using two geographical samples, a European and a global one, proceeding to compare obtained results. Such analysis was performed employing an ex ante implied proxy for the cost of equity, which has been selected in order to overcome methodological weaknesses of previous studies. Fixed and Random effect regression were employed to test the study hypotheses. Results show that sustainability can reduce the cost of equity due to lower firm riskiness, as perceived by markets and investors. Geographical specificities, on the other hand, do not play a significant role. The authors concluded that CSR practices have the potential to create a type of goodwill or moral capital for more sustainable firms that acts as protection when negative events occur, preserving shareholder value and reducing the firms’ cost of equity.

Abdul Sattar (2015) conducted research to bridge the gap by empirical evidence about cost of capital (WACC) and its effect to the performance of Karachi Stock Exchange (KSE) 100 Index listed companies from the perspective of Firm Value and profitability. He found that there is a significant impact of Weighted Average Cost of Capital on Firm Value and Return on Asset. Also found a positive effect between Firm Size and Return on Assets whenever any change occurs in Independent Variables except one variable i.e. WACC. WACC gives negative impact on Firm Value and Return on Assets. Any change in WACC can affect the return on assets of the firm. Another evidence found that there is no effect of Total Debt Ratio on Return on Asset.

3.0       Methodology

The study is based on an ex-post facto research design since the event has already taken place and no attempt can be made to manipulate the data for the study. Also,  the  study is based on a correlational design which arrived at making prediction based on the relationship that exist between the variables. The population for this study is all the 6 listed construction firms on the Nigeria  Exchange Group market as of 31^st December 2021. The sample size of this study is 1 construction firm that is listed on the floor of the Nigerian Exchange Group. The selection of the 1 firm was arrived at based on the fact that they had complete annual report for the period under study. They have also been on the stock exchange before the study period and have remained listed till 2021. The sampling technique adopted for this study is the purposive sampling technique because firms were included in the study base on certain criteria. To begin, the researcher excludes any company that joined the Nigerian Exchange Group after 2012, which is the study’s starting point. This will be done to ensure a balanced panel data structure through the use of a homogeneous periodic scope, which is required for the estimate procedure. The researcher also deselect any firms that do not have all of the necessary data (in terms of data requirements) for the estimation. As a result, the final sample size is made up of 1 identified construction firm. The secondary data gathering technique was used in this study. Audited annual reports of relevant quoted companies on the Nigerian Stock Exchange website are among the secondary sources used in this study. This study employed analytical software of Stata version 16 and Microsoft excel for the analysis. The secondary data collected was analyzed using descriptive statistics, correlation, and regression analysis. The descriptive statistics was used to evaluate the characteristics of the data in terms of the mean maximum, minimum, and standard deviation and also check for normality of the data. Correlation analysis was employed to evaluate the association between the variables and to check for multicollinearity. Ordinary Least Square (OLS) regression analysis technique was employed to find the cause effect relationship between the independent variables and the dependent variables. However, this method of analysis helps to establish the relationship between the independent variables and the dependent variable of interest and to identify the direction of the relationship. It reflects the level to which a set of variables is capable of predicting a specific outcome. The econometric form of the model is expressed as:

Where:

RETA              =          Return on Asset

CODT             =          Cost of debt

DIYD              =          Cost of Equity

EAPS              =          Earnings Per Share

β₀                            =          Constant

β₁– β₃               =          Slope Coefficient

                      =          Stochastic disturbance

i                       =          i^th firm

t                       =          time period

4.0       Introduction

The study investigates the effect of cost of capital on firm performance in Nigeria by employing samples from listed construction firms in Nigeria between the periods of 2012-2021. In this study, cost of debt and cost of equity are the cost of capital proxies employed to examine their effect on firm performance. Firm performance is measured in terms of return on asset. Furthermore, to control the model’s goodness of fit, the study employed the variable of earnings per share in line with related extant literature.

Descriptive Analysis

In this section, the researcher examines the descriptive statistics for both the explanatory and dependent variables of interest. Each variable is examined based on the mean, standard deviation, maximum and minimum. Table 1 below displays the descriptive statistics for the study.

Table 1: Descriptive Statistics

    Variable |        Obs        Mean    Std. Dev.       Min        Max

————-+——————————————————–

        reta |          8     2.56855    1.209909      .9339     4.4755

        codt |         10     2.00302    .6157754     1.1985     2.8129

        diyd |         10     5.19875    2.695731          0     9.4661

        eaps |         10        4.68    1.794015       1.33       6.83

Source: Author (2023)

Table 1 above represents the results obtained from the descriptive statistics of the study. From the table it is observed that the mean of firm performance as proxied by return on asset (RETA) is 2.57 with a standard deviation of 1.21. The minimum and maximum value of return on asset was 0.93 and 4.48 respectively. In the case of the independent variable, the table shows that the mean of cost of debt (CODT) was 2.00 with a standard deviation of 0.62. Cost of debt was 1.20 and 2.81 on the minimum and maximum. The mean of cost of equity (DIYD) is 5.20 with a standard deviation of 2.70. Cost of equity has a minimum of 0 and a maximum of 9.47. In the case of the control variable, the table shows that earnings per share (EAPS) had a mean of 4.68 and a standard deviation of 1.79. Earnings per share had a minimum of 1.33 and a maximum of 6.83 during the period under study.

Correlation Analysis

In examining the association among the variables, the researcher employed the Spearman Rank Correlation Coefficient (correlation matrix), and the results are presented in the table below. 

Table 2: Correlation analysis

	RETA	CODT	DIYD	EAPS
RETA	1.00
CODT	-0.67	1.00
DIYD	0.45	-0.20	1.00
EAPS	0.86	-0.51	0.18	1.00

Author’s computation (2023)

In the case of the correlation between cost of capital and firm performance, the table shows that there is a negative association between cost of debt (-0.67) and firm performance as proxied by return on asset. However, the table shows that the independent variable of cost of equity (0.45) has a positive association with firm performance as measured in terms of return on asset. The control variable of earnings per share (0.86) has a positive association with firm performance as proxied by return on asset. However, all association are seen to be weak, hence there is no need to suspect the presence of multicollinearity in the model. Furthermore, to test the hypotheses a regression results will be needed since correlation test does not capture cause-effect relationship.

Regression Analyses

The researcher employed the OLS regression analysis to analyze the cause-effect relationships between the dependent and independent variables, as well as to test the hypotheses, because the results show that there is no heteroskedasticity. The OLS pooled results obtained is presented and discussed below.

——————————————————————————

        reta |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]

————-+—————————————————————-

        codt |  -.5270151   .3904098    -1.35   0.248    -1.610966    .5569362

        diyd |   .1327658    .084408     1.57   0.191    -.1015884      .36712

        eaps |   .4280155   .1272346     3.36   0.028     .0747557    .7812753

       _cons |   .8940919    1.31949     0.68   0.535      -2.7694    4.557584

——————————————————————————

FStats: 10.01 (0.0249); R-Squared: 0.8824; VIF: 1.26; Hettest: 0.89 (0.3461)

It is observed from the OLS pooled regression that the R-squared value of 0.88 shows that about 88% of the systematic variations in firm performance as measured by return on asset in the pooled construction firms over the period of interest was jointly explained by the independent and control variables in the model. This implies that firm performance in Nigeria cannot be 100 percent explained by cost of capital and the control variable in the model. The unexplained part of firm performance can be attributed to the exclusion of other independent variables that can impact on firm performance but were excluded because they are outside the scope of this study, however, they have been captured in the error term.  The F-statistic value of 10.01 and its associated P-value of 0.0249 shows that the OLS regression model on the overall is statistically significant at 5% level, this means that the regression model is valid and can be used for statistical inference.  The researcher employs the variance inflation factor (VIF) technique to determine the presence or absence of multicollinearity in this study, as in most others. A cut-off VIF value of 10 is used to determine whether a VIF is high. This is in line with Gujarati’s (2004) advice that the mean VIF should be less than ten. The table above shows a mean VIF value of 1.26 for the model of firm performance which is less than the benchmark value of 10 indicating the absence of multicollinearity in the specified models. The Breusch Pagan module in Stata 14 is used by the researcher to conduct the heteroscedasticity. The result obtained from the model as shown in the table above reveals the probability value as P-value: 0.3461 for the model. These results indicates that the assumption of homoscedasticity has not been violated due to very high P-values which is statistically insignificant at 5% level or 1% level. This suggest that the estimate of the OLS regression can be relied upon for policy recommendation.

The results obtained from the OLS regression model revealed that cost of debt has an insignificant negative effect on firm performance proxied by return on asset of listed construction firms during the period under investigation. This is shown as; cost of debt (Coef. = -0.527, t = -1.35 and P -value = 0.248). Following the results above, it is revealed that the effect of cost of debt on firm performance is negative and insignificant. This finding is consistent with the stated null hypothesis which leads to its acceptance and the rejection of the alternate hypothesis. Hence, cost of debt has no significant effect on the performance of listed construction companies in Nigeria during the period under study. Several scholars such as Ivascu and Barbutu-Misu (2017); Sumaryati and Tristiarini (2017); Omwanza (2018) and Akintoye et al. (2019) document a significant and positive impact of COC on firm’s financial performance. These studies reasoned that corporate backer expect the required return on their investments (also referred to as COC), and in return, they expect the firms to deliver this expected return. Furthermore, the results obtained from the OLS regression model revealed that cost of equity has an insignificant positive effect on firm performance proxied by return on asset of listed construction firms during the period under investigation. This is shown as; cost of equity (Coef. = 0.133, t = 1.57 and P -value = 0.191). Following the results above, it is revealed that the effect of cost of equity on firm performance is positive and insignificant. This finding is consistent with the stated null hypothesis which leads to its acceptance and the rejection of the alternate hypothesis. Hence, cost of equity has no significant effect on the performance of listed construction companies in Nigeria during the period under study. In contrast, some scholars such as Abdul-Sattar (2015); Zheng, Rahman, Begum and Ashraf (2017) and Nadya et al. (2019) found negative and significant impact of COC on financial performance. This implies that the firm’s value increases when the firm’s COC decreases. The negative impact is due to the known preference order among financing sources. Firms prefer to finance new investments in a certain hierarchical order: internal funds first, debt issuance second, and new stock issuance last (Myers, 1984; Myers & Majluf, 1984). Moreover, only profitable firms have the ability to finance new investments from retained earnings and not through the issuance of new debt and/or equity. However, some scholars such as Apergis, Artikis, Eleftheriou and Sorros (2012), Al-Tamimi and Obeidat (2013), and Ibrahim and Ibrahim (2015) do not prove any significant impact of COC on financial performance.

5.0       Conclusion and Recommendation

If a firm finances its operation with debt, it is borrowing money from a lender for a certain period of time with a promise to pay the money back with its interest. In return the lender receives interest payments on the loan. With equity financing the shareholders buy shares in the company, they become owners and in return they receive a portion of the firm’s profit. Cost of capital in general represents the different costs attached to the different sources of financing obtained by an organization. The cost of capital is a history of the costs arising from the capital structure, i.e. the mix of debt and equity. Thus, optimal capital structure is synonymous with optimal COC. In economics, these two terms are inseparable as they have the same objective. A good combination of capital structure that minimizes COC (returns on debt and equity) and maximizes the value of the firm is the goal of every firm. A company’s investment is considered valuable only when the predictable return on capital is higher than the cost of capital. The logic behind this is that a company should earn maximum profits to satisfy its shareholders, which leads to an increase in the value of the company. The appropriate level of cost of capital is one of the most critical issues that many financial experts try to identify. Specifically, the researcher concludes that while the cost of debt insignificantly reduces firm performance, cost of equity insignificantly improves performance of listed construction companies in Nigeria. Based on the results of the study, the study recommended that it would be ideal to advice any corporate manager of construction company in Nigeria to make concerted effort in obtaining equity capital given that it has positive significant effect on firms’ performance. However, with regards to debt capital, it is not advisable for the corporate entities to seek for such finances due to the negative effect it has on firms’ performance, even though the effect is insignificant.

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