The Impact of Firm-Specific Characteristics on the 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. 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. 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. 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.