Abstract
We test two models with the purpose of finding the best empirical explanation for corporate financing choice of a cross section of 27 Nigerian quoted companies. The models were developed to represent the Static tradeoff Theory and the Pecking order Theory of capital structure with a view to make comparison between theoretical predictions and empirical results. Data pertaining to 1996 through 2006 were used. By using ordinary least square multiple regression methods, we aim at establishing which of the two theories has the best explanatory power for Nigerian firms. The analysis of the outcomes led to the conclusion that both of them appears to be a good description of the financing policies of those firms for the period under review.
Highlights
The determining factors affecting the choice of the capital structure of firms can be broken down into four categories, according to their purpose towards:(a) Improving the conflicts between the various stakeholders with claims upon the firm resources, machines, managers: (b)Conveying private information to the capital markets or mitigating effects of adverse selection.(c) influencing the nature of products or competition in the product/input market s: and (d) Influencing the results of disputes over corporate control (Harris and Ravir 1991).Financing policy by firms requires managers to identify ways of finding new investment
With the recent development in the Securities and Exchange Commission (SEC), Nigerian stock exchange (NSE), and the entire financial system, with firms being listed and quoted in the NSE, one issue that has received great attention is the capital structure decision. This follows because the market value of the firm may be affected by the capital structure decision
The debt-equity mix has implications for the shareholders earning and risk, which in turn will affect the cost of capital and the market value of the firm
Summary
The determining factors affecting the choice of the capital structure of firms can be broken down into four categories, according to their purpose towards:(a) Improving the conflicts between the various stakeholders with claims upon the firm resources, machines, managers (the agency approach): (b)Conveying private information to the capital markets or mitigating effects of adverse selection. (the asymmetric information approach)(c) influencing the nature of products or competition in the product/input market s: and (d) Influencing the results of disputes over corporate control (Harris and Ravir 1991).Financing policy by firms requires managers to identify ways of finding new investment. With the recent development in the Securities and Exchange Commission (SEC), Nigerian stock exchange (NSE), and the entire financial system, with firms being listed and quoted in the NSE, one issue that has received great attention is the capital structure decision. This follows because the market value of the firm may be affected by the capital structure decision. The debt-equity mix has implications for the shareholders earning and risk, which in turn will affect the cost of capital and the market value of the firm. The term capital structure is used to represent debt/equity mix
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