Capital Structure Decisions and Firm Performance of Small and Medium Enterprises in Enugu State

Capital structure decisions remain one of the most consequential yet poorly understood aspects of financial management for small and medium enterprises (SMEs) in Nigeria, where access to diverse financing options is constrained by market imperfections and institutional barriers. This study investigated the relationship between capital structure decisions and the financial performance of SMEs in Enugu State, focusing on registered enterprises in the manufacturing and service sectors. The study was anchored on the trade-off theory of capital structure, which argues that firms balance the tax benefits of debt against the costs of financial distress to arrive at an optimal capital mix. A survey and documentary research design was adopted, with a population of 380 SME owners and financial managers. A sample of 195 respondents was drawn using stratified random sampling. Primary data were obtained through structured questionnaires, while secondary data were extracted from enterprise financial records. Data were analyzed using multiple regression analysis. Findings showed that debt-to-equity ratio had a negative effect on return on assets, while retained earnings financing was positively and significantly associated with profitability. The study concluded that over-reliance on debt financing impairs the performance of SMEs due to high interest costs and repayment pressures. It was recommended that the Bank of Industry should expand equity-based financing programs tailored to SMEs in Enugu State to reduce their dependence on costly debt instruments.

Keywords: Capital structure, firm performance, small and medium enterprises, trade-off theory, debt financing