Abstract
The purpose of this paper is to investigate empirical evidence on capital structure determinants in Nigeria. This research has been performed using a sample of 50 companies listed on the Nigeria Stock Exchange from 2001 to 2010. The relationship between the short-term and long-term debt and four explanatory variables were observed. The results of the cross-sectional OLS regression revealed that the static trade-off theory and agency cost theory are relevant to Nigerian companies whereas there was a little evidence in support of pecking order theory. The findings of this study confirm that profitability, growth, firm size and tangibility are explanatory variables of capital structure. Key words: Capital structure, static trade-off theory, pecking order theory, agency cost theory.
Highlights
In the past several decades, the role of capital structure has been an important consideration in corporate finance (Chen and Chen, 2011)
The findings of this paper provide further evidence on capital structure determinants in Nigeria during the period of 2001 to 2010
The relationships between short-term and long-term debt and four explanatory variables such as profitability, growth, tangibility and size were examined to explain the capital structure theory that is relevant in Nigerian context
Summary
In the past several decades, the role of capital structure has been an important consideration in corporate finance (Chen and Chen, 2011). A number of theories have explained the variations in capital structure across firms and these theories suggest that the selection of capital structure depends on attributes that determine the various costs and benefits associated with debt and equity financing. Due to Modigliani and Miller hypothesis (1958), three theories have been developed These theories include static trade- off theory, pecking order theory and agency cost theory. The static trade – off theory ( known as taxbased theory) posits that optimum capital structure is achieved at a point where the net tax advantage of debt financing balances various costs associated with leverages such as bankruptcy cost. The agency cost theory of capital structure states that an optimal capital structure will be determined by minimizing the costs arising from conflict of interests between the parties involved. The paper concentrates on the structure theory that is relevant in the Nigerian context
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