Capital Adequacy Ratio, Loan-to-Asset Ratio, Non-Performing Loan, and Market Valuation: Empirical Evidence from Listed Financial Services Firms in Nigeria

Abstract

Creative Accounting Practices often employed to present a more favourable financial position than reality distort key financial indicators that investors depend on to evaluate firm value. In light of these concerns, this study investigates the relationship between Capital Adequacy Ratio (CAR), Loan-to-Asset Ratio (LAR), Non-Performing Loan (NPL) and market valuation, based on empirical evidence from listed financial services firms in Nigeria over the period 2012 to 2024. Employing an ex-post facto research design, the study retrospectively analysed secondary data from 21 purposively sampled financial services firms, selected from a population of 48 listed firms on the Nigerian Exchange Group. Data were sourced from financial statements, regulatory bodies, and financial databases, enabling the examination of how Capital Adequacy Ratio (CAR), Loan-to-Asset Ratio (LAR), and Non-Performing Loans (NPL) affect firm value as measured by the Price-to-Book Ratio (PBR). Quantitative analysis methods including descriptive statistics, Pearson correlation, and panel regression were applied, with the Random Effects Model selected through the Hausman test. The results demonstrate that CAR and LAR have statistically positive and significant effects on market valuation, reflecting the importance of strong capital buffers and efficient lending activities in enhancing investor confidence. Similarly, NPLs exhibit a negative, and significant effect, highlighting the detrimental effects of non- performing loan on firm value. The study recommends that financial institutions and regulators should prioritize capital adequacy, optimize lending practices, and implement stringent steps to mitigate the adverse effects of non-performing loans and support sustainable market valuation in Nigeria’s financial services sector.