Debt Financing and Firm Performance: Evidence from Cointegration Analysis

Abstract

Erstwhile studies proved that debt can positively or negatively affect firm's performance. This study tests the long run and short run dynamic of debt on firm‘s performance in the context of the negative and positive effects. The panel cointegration model, fully modified Ordinary Least Square and error correction model were employed. The panel cointegration result indicates existence of long run relationship between debt and firm performance. 19.85% long run disequilibrium is corrected within a year while there is significant short run relationship between debt and return on investment. In the same vein, 1.52% long run disequilibrium is corrected within a year while there is significant short run relationship between debt and return on assets. This implies that the use of debt on investment and asset, should be properly scrutinise within the fine line of investment and asset to determine optimal use.