The Determinants of Capital Structure of Nigerian Quoted Firms

Abstract

Empirical work on capital structure in emerging markets like Nigeria has been limited and met with low explanatory power. This study investigates the determinants of capital structure in Nigeria. Unlike prior work, the study investigates capital structure determinants along five dimensions namely: firm-specific and industry factors; taxes; non-financial stakeholders; supply-side factors; and the maturity structure of corporate liabilities. 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 asset intangibility, firm age and expected inflation while those factors that exert negative influence on capital structure include asset tangibility, growth, size, volatility of earnings, profitability, liquidity, dividend-paying status and uniqueness of industry. Second, there is weak evidence that tax considerations are crucial in capital structure choice. 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-specific characteristics including the marginal tax rate. 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 also supports the target adjustment and market conditions models. Third, this study provides new evidence that financing decisions interact with non-financial stakeholders. Specifically, the results support the use of capital structure as a possible bargaining variable by employees, suppliers and customers. Highly levered firms exert pressure on themselves to treat non-financial stakeholders decently. Fourth, there is strong evidence in support of supply-side of capital as leverage increases with debt market access but behaves counter-cyclically as it declines with equity market conditions, term spread and GDP growth rate. The study recommends the use of leases for financially- and collateral-constrained firms, non-debt tax shelters for corporate tax planning, government simplification of tax administration, cautious use of debt for industries with production technologies that place NFS at risk and macroeconomic policies that promote prudent use of debt and debt maturity.