Financial Ratio Performance and Market Value of Listed Deposit Money Banks in Nigeria: An Empirical Study

Abstract

This study investigates the impact of key financial ratios; Return on Assets (ROA); Loan-toDeposit Ratio (LDR), and Cost-to-Income Ratio (CIR) on the market valuation (proxied by Tobin's Q) of listed Deposit Money Banks (DMBs) in Nigeria from 2015 to 2024. Utilizing panel data regression with fixed effects and secondary data from five listed Nigerian DMBs, the analysis addresses gaps in prior research by incorporating post-pandemic dynamics and regulatory shifts. Diagnostic tests confirmed data suitability (unit roots, multicollinearity, heteroscedasticity), and cointegration tests (Pedroni) established long-run equilibrium relationships. Results indicate that ROA exerts a statistically significant positive influence on Tobin's Q (β = 0.221, p < 0.01), underscoring the importance of profitability for market valuation. Conversely, CIR demonstrates a significant negative relationship (β = -0.030, p = 0.008), highlighting the detrimental effect of operational inefficiency. LDR exhibits a marginally positive but statistically weak association (β = 0.018, p = 0.052), suggesting limited explanatory power for liquidity management. The model explains 60.3% of the variance in Tobin's Q (Adjusted R² = 0.603, F-statistic = 19.46, p < 0.01), confirming the collective significance of these ratios. The study concludes that profitability (ROA) and operational efficiency (CIR) are primary determinants of market valuation in the Nigerian banking sector, while liquidity (LDR) plays a secondary role. These findings align with signaling theory, as positive financial metrics enhance investor confidence, and agency theory, as managerial efficiency correlates with shareholder value maximization.