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The rate of financial failures and disappointing performance among the oil and gas companies is worrisome, which has made investors to be apprehensive of the future of their investments. Consequently, we investigated the connection between the capital structure and financial performance of downstream oil and gas companies quoted on the Nigerian Stock Exchange with focus on long- term liquidity and solvency measured in terms of ‘z’ score and interest cover as dependent variables. Capital structure was proxied by total debt to equity. The study used ex-post facto research design. The population consisted of eight oil and gas companies listed on the Nigerian Stock Exchange as at 31st December 2017. The companies were chosen using purposive sampling technique. Required data were gathered from financial statements of the companies that were sampled using published data. Validity and reliability of the data were premised on the scrutiny and certification by the external auditors. In data analysis, descriptive and inferential statistics were used. The data were subjected to random effects and Driscoll-Kraay estimation models to test the hypothesis of the study. The study found that capital structure positively affected financial performance. Specifically, the study showed that total debt to equity ratio has positive and significant relationship with the financial performance of selected oil and gas firms in Nigeria proxied by ‘z’ core (coefficient of 0.231, p-value 0.010 and Adj R2 of 0.22%) and interest cover (coefficient of 0.043, p-value 0.035 and Adj R2 of 0.24%). This finding supports the trade-off theory which encourages the use of debt capital. The study recommends that the firm’s managers should increase the use of long term funds and discourage the use of short term finance. It also recommends that the owners of the businesses should inject more equity finance as the total debt to equity ratio was considered too high.
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