Determinants of Leverage: Dynamic Panel Data Evidence from Nigerian Listed Non-financial Firms

Abstract

This study analyzed the determinants of leverage of non-financial firms in Nigeria, applying the Two-stage System Generalized Method of Moment (SYS-GMM) on 73 listed firms over the period 2010- 2020. Specifically, we considered how the four main determinants that have received serious attention in the literature (asset tangibility, growth, profitability and size) and two other determinants (age & liquidity) that have not been thoroughly investigated in the literature affect leverage. Results show that leverage is positively related to asset tangibility, growth and age and negatively related to profitability, size and liquidity. Thus, we conclude that high-growth and older firms with a high proportion of tangible assets tend to rely more on debt than larger firms with the capacity to generate internal funds or retained earnings. Government should provide the needed enabling environment that will enhance the ease of doing business so that firms can generate adequate profitability that will dissuade the use of debt. In this regard, monetary policies aimed at reducing the inflation rate, interest rate and appreciation of the real exchange rate are capable of enhancing the capacity and ability of Nigerian firms to generate higher profits.