Abstract

The purpose of the research was to investigate to what extent the size of a firm in Nigeria oil and gas industry affects the magnitude of external borrowings. The study went further to examine the relationship between firm size and financial leverage in the same industry; as well as the causal relationship among the variables under study. Simple regression model was formulated to guide the analysis. The analysis of the time series data reveals that financial leverage is significantly but negatively affected by firm size in the industry. This implies that as firms increase in total assets, the firms tend to play down on sourcing for fund through external borrowing. The outcome is in line with some previous studies and in accordance with the theoretical framework of the study. There is no causality running from either Firm Size to Financial Leverage or otherwise, at 2 years lagged period; which implies that Financial Leverage does not granger cause Firm Size and vice versa. A negative relationship was revealed between firm size and financial leverage; though very insignificant; which implies that firm size and financial leverage change/increase in opposite direction in oil and gas industry. Therefore, firms at growth age, with a growing asset base, will need external borrowing more than a firm at mature or declining age with huge asset base and accumulated retained earnings.

Highlights

  • In financial affairs of companies, financial leverage is a very important factor in the business sectors, especially working in the developing countries [1].Effective financial leverage is very important due to its significant effect on profitability of company and the existence of company in the marke t[12].The privileges and rights which a company enjoys within, around and outside it may be a factor of size; in terms of current and fixed asset base

  • Firm size is defined in line with [13] who defines firm size in terms of total assets held by an organization

  • The results indicated that firm size and asset tangibility significantly affect the financial leverage

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Summary

Introduction

In financial affairs of companies, financial leverage is a very important factor in the business sectors, especially working in the developing countries [1].Effective financial leverage is very important due to its significant effect on profitability of company and the existence of company in the marke t[12].The privileges and rights which a company enjoys within, around and outside it may be a factor of size; in terms of current and fixed asset base. The financial institutions should be more disposed to advance credits to companies with a sound asset base This is because such firms would be able to provide marketable collateral securities for such borrowings. Many notable researchers such as [15] had found enough evidence to associate industrial and economic growth with the growth in asset base.[6] emphasizes that profit interacts with size. This implies that large firms are less susceptible to bankruptcy because they tend to be more diversified than smaller companies. Larger firms are more likely to diversify their financing sources; while alternatively, size may be a proxy for the probability of default, for it is sometimes contended that larger firms are Inyiama Oliver Ikechukwu and Ubesie Cyril Madubuko: Effect of Firm Size on Corporate

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