Testing The M & M Relevance and Irrelevance Theories of Capital Structure in Quoted Manufacturing Firms in Nigeria

Abstract

The study empirically test the Miller & Modigliani (1958, 1961) irrelevance and relevance theory of capital structure in Nigeria. Thus, 16 manufacturing firms listed on the Nigerian Stock Market for the period 2010 to 2020 were tested. Three capital structure variables such as short-term debt to equity ratio, long-term debt to equity ratio and total debt-to-equity ratio (independent variables) were regressed against firm value (dependent variable). The fully modified ordinary least squares (FMOLS) was employed in the analysis of the data, and the empirical results obtained from the two models indicate that the M & M irrelevance and relevance theory does not hold in the Nigerian manufacturing firms within the investigating period. The study recommends that manufacturing firms in Nigeria should begin to focus attention on other factors outside capital structure that could possibly influence the value and performance of the firm. Some of the likely factors could be dividend policy and firm’s specific factors such as total assets, profitability, liquidity, risk exposure, growth among others.