Liquidity Risk, Capital Structure, and Financial Performance: A Panel Analysis of Nigerian Deposit Money Banks

Abstract

This study examines the impact of liquidity risk and leverage on the financial performance of listed Deposit Money Banks (DMBs) in Nigeria from 2013 to 2022. Using panel data from all 15 listed DMBs on the Nigerian Exchange Group, the study employs fixed-effects regression with robust standard errors to analyze the relationship between liquidity risk (measured by loan-to-asset ratio), leverage (measured by debt-to-equity ratio), and return on equity. The results show that liquidity risk has a positive and significant effect on ROE (coefficient = 0.132, p = 0.000), suggesting that banks in this high-yield environment profitably transformed liquidity risk through active lending. Conversely, leverage has a significant negative effect on ROE (coefficient = -1.351, p = 0.007), consistent with the Trade-Off Theory. These asymmetric findings imply that effective liquidity management enhances profitability, while excessive leverage erodes it. The study contributes empirical evidence on risk-performance dynamics in emerging market banking and offers implications for risk management policy.