JOURNAL OF BANKING AND INVESTMENT Volume 1, Number 1, June 2023 1 Inflation and Capital Structure of Quoted Industrial Goods Manufacturing Firms in Nigeria Prof. John C. Imegi 1 , Dr. Marshal Iwedi 2 & Chiwuba AnthonyNnaji 3 Citation: Imegi, J.C., Iwedi, M., & Nnaji, C.A. (2023). Inflation and Capital Structure of Quoted Industrial Goods Manufacturing Firms in Nigeria. Journal of Banking and Investment, 1(1), 1-15. ABSTRACT This study examined the relationship between inflation and capital structure of industrial goods manufacturing firms in Nigeria. The study modelled debt to equity ratio as the function of inflation rate, nominal interest rate and real interest rate. Panel data were sourced from central bank of Nigeria statistical bulletin and financial statement and annual reports of the industrial goods firms from 2012-2021. Panel regression models were formulated to analyze the relationship between inflation and capital structure. The study found from the fixed effect model that 45 percent variation on debt equity ratio of Nigeria quoted industrial goods manufacturing firms can be explaining by variation on real interest rate. The regression coefficient indicated that there is no statistically significant relationship between inflation rates and debt equity ratios of the listed companies in Nigeria; there is no statistical evidence that there is an effect of the consumer price index on the debt equity ratio, and also no statistical evidence that there is a significant effect on the debt equity ratio from the nominal interest rate. However, the debt equity ratio increases with the changes in the nominal interest rate when the industry performance improves. The study concludes that it is advantageous for a company to reduce its debt portfolio and increase its equity holdings to improve its financial condition and its long-term growth when the economy is doing well. For this to happen, however, the company's management must recognize that there are risks when it decides to go the equity route, and therefore it requires them to take a disciplined approach to managing its balance sheet. We recommend that company with high debt levels should consider reducing its debt in order to reduce its borrowing costs and improve its financial strength and it is in the best interest of a company to increase its level of equity financing in order to take advantage of the higher returns that an adequately funded balance sheet can offer. Keywords: Inflation, Fisher effect, Capital structure, Debt equity ratio, Nominal interest rate and Real interest rate INTRODUCTION Theories about capital structure determinants have been mostly developed around firm- specific factors. Titman and Wessels (1988) argue that firm’s choice of financing is related to firm characteristics. These characteristics are, among others, asset structure, growth, size, operating income volatility, profitability, industry classification, non-debt tax shields, operating leverage, and uniqueness of firm’s business line. Harris and Raviv (1991) later provided the survey for the literature. Another firm-specific characteristic that is found to be related to firm’s capital structure choice is business risk. There is a disagreement regardi ng the sign of the effect of this variable on the optimal debt level, which may be due to different measures business risk. Castanias (1983) uses tax shelter bankruptcy cost to measure business risk and finds that ex-ante default costs are large enough to induce firms to hold an optimal mix of debt and equity. Meaning, there is roughly positive relationship between bankruptcy costs and optimal debt level, which contradicts static tradeoff theory. Carleton and Silberman (1977) use variance of return on assets as proxy for business risk and find negative effect on debt levels. This is due to variance of return increases cost of capital, hence reduces firm’s leverage level. Conversely, Bradley, Jarell, and Kim (1984) find that operating income volatility lowers the use of debt as it increases uncertainty in tax shields. 1. Prof. John C. Imegi, is a Professor of Corporate Finance, Department of Banking and Finance, Rivers State University, Nkpolu-Oroworukwu 2. Dr. Marshal Iwedi: is a Lecturer 1, Department of Banking and Finance, Rivers State University, Nkpolu-Oroworukwu 3. Chiwuba Anthony Nnaji, is a Postgraduate Student Department of Banking and Finance, Rivers State University, Nkpolu-Oroworukwu