Too Much to Owe, Too Little to Grow? Debt-to-Asset Ratio and Stock Market Performance of Nigerian Banks

Abstract

The growing competition in the Nigerian banking industry and the pressure to deliver high returns have encouraged many banks to adopt higher levels of debt, often justified by the need to expand operations or increase market share. However, this increasing reliance on borrowed funds raises critical questions about financial health, risk exposure, and how the market perceives such decisions. Excessive debt can distort a bank’s financial position, weaken investor confidence, and trigger a fall in share prices as the market reacts to increased risk. Hence, this study examined the effect of debt-to-asset ratio (DAR) on the stock market performance of listed Deposit Money Banks (DMBs) in Nigeria. From a population of thirteen (13) listed banks on the Nigerian Exchange Group (NGX), a sample of eleven (11) banks were purposively selected. Data were obtained from the audited annual reports and financial statements of the sampled banks (2012-2024). Hypotheses were tested using panel regression analysis under the random effects model, at a 1% significance level. Findings revealed that increase in debt-to-asset ratio has a negative and significant effect on stock market performance of Nigerian banks (β = -58.6227, p = 0.0029). In conclusion, excessive reliance on debt may undermine market valuation, and so bank management should immediately review all existing debt obligations and develop a structured debt reduction and optimization plan that sets a target debt-to-asset ratio, prioritizes repayment of high-interest and short-term debt, and links new borrowing to concrete investment projects with clear cash flow projections.