Capital Structure, Agency Costs, and Firm Performance: Evidence from Nigerian Listed Non-Financial Firms

The relationship between capital structure decisions and firm performance has generated substantial theoretical and empirical debate, with agency cost theory offering a compelling framework for understanding how debt and equity financing alter managerial incentives and governance outcomes. This study examines the mediating role of agency costs in the capital structure-performance relationship among non-financial firms listed on the Nigerian Exchange Group. Secondary panel data covering 70 firms across consumer goods, industrial goods, oil and gas, and agricultural sectors for the period 2017 to 2022 are analysed using a three-stage structural equation model to separately estimate the capital structure-agency cost and agency cost-performance pathways. Agency costs are measured through asset utilisation ratio, selling, general and administrative expense ratio, and free cash flow-to-asset ratio, while performance is assessed using return on assets, Tobin's Q, and operating cash flow margin. The study employs the Arellano-Bond dynamic panel estimator to address simultaneity and reverse causality between capital structure and performance. The theoretical framework synthesises Jensen and Meckling's agency cost model, the trade-off theory, and the market timing hypothesis of capital structure. The analysis provides sub-sector level findings that reveal heterogeneous agency cost profiles across the industries studied. Existing literature on Nigerian listed firms has largely overlooked the mediating role of agency costs, relying instead on direct leverage-performance regressions. This study fills that gap and provides findings relevant to corporate governance practitioners, institutional investors, and the Securities and Exchange Commission's governance scorecard development. Keywords: capital structure, agency costs, firm performance, panel data, Nigeria