Abstract
The study examined the relationship between shareholders’ wealth and debt-equity mix of quoted companies in Nigeria. The study was based on a panel data set from 1997 to 2011 comprising sixty non – financial companies. The study specified two panel regression models. Two measures of shareholders’ wealth: Return on Equity (ROE) and Earnings per Share (EPS) were taken as the dependent variables respectively. The principal explanatory variable for each of the models was Debt Ratio (DR). The results of the study conform to our a-priori expectation that there is a significant negative relationship between shareholders’ wealth and debt-equity mix of quoted companies in Nigeria. This is not unexpected considering the inactive debt market in Nigeria, the dominance of the money market in the Nigerian financial system, the shallow nature of the Nigerian capital market, the buy-hold syndrome of the Nigerian investors and the macro economic instability in the country. It was recommended that adequate fiscal policies, relevant capital market institutional and legal framework should be put in place. These measures, we believe, will enhance the development of the Nigerian capital market and create a more conducive environment for business to thrive.
Highlights
Half a century of research on capital structure attempted to verify the presence of an optimal capital structure that could amplify the company’s ability to create value and invariably maximize the wealth of the shareholders
It was hypothesized that Debt Ratio (DR) as a proxy of corporate leverage is negatively related to Earning per Share (EPS) and Return on Equity (ROE) as proxies of shareholders’ wealth
The study conforms to our a-priori expectation that there is a significant negative relationship between shareholders’ wealth and debt-equity mix of quoted companies in Nigeria. supporting the pecking order theory
Summary
Half a century of research on capital structure attempted to verify the presence of an optimal capital structure that could amplify the company’s ability to create value and invariably maximize the wealth of the shareholders. The risk of default may create what Myers (1977) refers to as an “underinvestment” or “debts overhang” problem In this case, debt will have a negative effect on the value of the firm. High debt ratios may be used as a disciplinary device to reduce managerial cash flow waste through the threat of liquidation (Grossman and Hart, 1982) or through pressure to generate cash flows to service debt (Jensen, 1986) In these situations, debt will have a positive effect on the value of the firm. The objective of the study is to examine the relationship of the use of debt in the capital structure of quoted companies in Nigeria to the wealth of shareholders
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