Abstract
Empirical work on capital structure in emerging markets like Nigeria has been sparse and met with low explanatory power. This study investigates the determinants of capital structure in Nigeria. The population of study comprises all non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 out of which 50 companies that met the minimum data criteria were utilized. Using panel data least squares regression, modified to weighted (cross section- and period-) models, the research documents the following findings. First, the factors that exert positive influence on corporate borrowing include firm age, intangible assets and expected inflation while those factors that exert negative influence on capital structure include tangible assets, growth, size, volatility of earnings, profitability, liquidity, dividend-paying status and uniqueness of industry. The results were, at best, mixed with respect to the portability of pecking order, target adjustment, trade-off, agency and market conditions models. The pecking order beats the trade-off model based on the signs of coefficients of firm-level attributes. In order words, asymmetric information explains why smaller, less profitable, less liquid firms with more risky intangible assets and which are low dividend-payers end up relying primarily on debt financing and vice versa. The study recommends the use of leases for financially- and collateral-constrained firms as well as instruments that facilitate information symmetry in financial markets.
Highlights
Capital structure remains an active area of financial research
The included control variables are marginal tax rate (MTR); unemployment rate (UER); unionization ratio (UNR); staff cost (STC); relationship-specific investments (RSI); rating dummy (RAT) as a measure of debt market access; credit to private sector (CPS) as a measure of financial intermediation; monetary policy regime or rate (MPR) to underscore monetary policy tightness or easing; term spread (TS); equity market capitalization (EMC); All-Share index (ASI); government borrowing to GDP (GB) to ascertain possibility of crowding out of private-sector borrowing [Badoer &
The study has attempted an investigation of the impact of firm attributes on the capital structure of Nigerian firms
Summary
Capital structure remains an active area of financial research. Despite decades of research, there is much contention about the cross-sectional determinants of corporate capital structure. Several extant capital structure models, such as the tradeoff, pecking order, target-adjustment, market timing and agency models, have been tested using data from developed markets The portability of those models in emerging markets is a matter of empirical tests so that if those theories do not hold, their implications too may be irrelevant to economists and corporate finance types in emerging market domain. Chandrasekharan [23] examines the determinants of capital structure of Nigerian listed firms for a sample of 87 firms over a five-year period utilizing five firmspecific factors namely size, age, growth, profitability, and asset tangibility This five firm-specific factor approach to capital structure investigation is considered too narrow and limiting in insights despite the study’s R-square of 54 percent.
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