The Effect of SMEs' Cost of Capital on Their Financial Performance in Nigeria

Abstract

Small and medium enterprises (SMEs) play an important role in the development of a nation’s economy. The reasons for this are the fact that SMEs provide benefits such as job creations, knowledge spillover, economic multipliers, innovations driver and cluster development in an economy. Given the importance of SMEs in an economy, it becomes quite plausible to look at factors affecting their financial performance which is a major determinant of their survival and growth. This paper examines the effect of SMEs cost of capital on their financial performance using a sample of five SMEs from the total population of eleven SMEs listed on the Alternative Securities Market (ASEM) of the Nigerian Stock Exchange Market during the five year period, 2008 – 2012. Data for the selected SMEs were generated and analyzed using linear regression technique. The result shows that SMEs cost of capital have insignificant effect on their financial performance (return on asset, ROA). The outcome of these finding, indicates consistency with prior empirical studies and provide evidence in support of Modigliani and Miller, M&M study, 1958. It is recommended that SMEs should utilize the opportunity created by ASEM to access long term financing as the costs have no effect on their performance.

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