Theoretical guidance suggests a trade-off between profitability and liquidity in effect of capital structure decisions. This study investigates the link between capital structure and profitability-liquidity trade-off using descriptive and Panel-VAR analysis for 18 listed manufacturing companies in Nigeria. Findings from this study show no evidences of profitability-liquidity trade-off as function of capital structure. However, this study found that profitability and liquidity responds similarly to capital structure. Relative to equity share, debt ratios have negative effect on profitability and liquidity. Relative to asset, debt has positive effect on profitability and liquidity. Evidences further suggest that the way profitability and liquidity respond to capital structure is reliant on the business cycle position of the economy. Finance managers are advised to keep abreast the economic trend in the decision to adopt debt financing.
Following the 2008 global financial crisis, the increased integration of economies has led to increased volatility and interdependence between the capital market and the exchange rate. Particularly, the free fall of oil price in the second half of 2014 spelt severe pressure and fluctuations on Nigeria's economic indicators with an attendant exchange rate crisis. In response, the all-share-index of the Nigerian Stock Exchange crashed by over 30 percent from 42,482.48 index points in June 2014 to 29,597.79 index points in the same period of 2016. Exchange rate is quite influential to the global business cycle and its movement reflects the competitiveness of a country in the international trade market (Ajayi and Mougoue, 1996;Alley, 2018;Dornbusch and Fischer, 1980). Not less can be said about the stock market for the speculative activities happening within it, which leads to uncertainty for market operators (Maku and Atanda, 2010;Tule, Dogo and Uzonwanne, 2018). Given the critical implications of fluctuations in these variables on each other and the economy, stability in both markets has become a great concern for academics and market players. Their continuous variation is generating unending
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