Capital Structure and the Value of Quoted Firms in Nigeria: A Test of Miller and Modigliani Irrelevant Hypothesis

Uzokwe Grace Onyinyechi

doi:10.46281/afbr.v3i2.403

Abstract

This study tested an insignificant hypothesis of the capital structure of Miller and Modiglian in Nigeria. The aim was to investigate the validity of the irrelevant hypothesis. The Tobins Q market value measure was modeled as a function of debt-to-equity ratio, long-term debt to equity ratio, and retained earnings ratio. Twenty companies were selected on the basis of the information needed to conduct the survey and the availability of annual financial reports for the ten-year period 2008-2017. Cross-sectional data were obtained from the annual accounts and annual reports of the companies. Random effects were used in the analysis of fixed and random effects. The study showed that 77% volatility in market value can be predicted by the variation of independent variables in the regression model. The beta coefficient of the variables found that the debt-to-equity ratio, the long-term debt-to-equity ratio, the capital-to-earnings ratio is positively and significantly related to the market value of the selected listed companies. The study concludes that capital structure is relevant, unlike Miller's and Modiglian's irrelevant hypothesis. Therefore, it is recommended that managers ensure an adequate combination of capital and debt.

Highlights

Classical opinion, like Gordons (1959), considered that micro-power as a measure of the profitability of a company is an indicator that the company is capable of adding value to its shareholders (Lintner, 1956)
The insignificance proposition theorem is a theory of the capital structure of a company, which assumes that leverage does not affect the value of the company unless the costs of the tax and hardships are incurred in the business environment
The results show that there is a negative and insignificant relationship between Short-term debt to Total assets (STDTA) and Long term debt to Total assets (LTDTA), and return on assets (ROA) and Profit Margin (PM); while TDE is positively related with ROA and negatively related with PM

Summary

Introduction

Like Gordons (1959), considered that micro-power as a measure of the profitability of a company is an indicator that the company is capable of adding value to its shareholders (Lintner, 1956). Classic models of financial valuation show that capital structure as a dividend policy is important because the optimal combination of capital affects the value of the company. Capital structure is a combination of sources of finance used by companies to finance their activities and assets (Modigliani and Miller, 1958). The concept of capital structure was not discovered until Modigliani and Miller (1958) explained it in the theory of the insignificance of their capital structure. The insignificance proposition theorem is a theory of the capital structure of a company, which assumes that leverage does not affect the value of the company unless the costs of the tax and hardships are incurred in the business environment

Methods

Findings

Discussion

Conclusion