Capital structure and business risk in Nigeria: Evidence from a panel data analysis
The publication of Modigliani and Miller's seminal work in the late 1950s ignited a\ud debate on the appropriate debt-to-equity ratio that companies should aim to achieve in\ud the long-term. But although some progress has been made on the subject, the theories\ud that emerged are imprecise, unwieldy and in most cases present completely opposing\ud views. Moreover, the empirical evidence for the different theories is largely confined\ud to firms in industrialised countries.\ud This thesis examines the determinants of capital structure decisions of Nigerian listed\ud firms, more specifically it focuses on the relationship between the business risk and\ud leverage choices of ninety-four publicly listed companies in Nigeria over the period of\ud seven years from 2000 to 2006 using a dynamic panel data framework under different\ud degrees of uncertainty in market demand conditions. Reduced form leverage\ud equations are derived and estimated by means of the Generalized-Method-of-\ud Moments-Instrumental-Variables (GMM-IV) techniques which correct for the\ud misspecification error induced by endogeneity of explanatory variables.\ud The results indicate that, the design and adjustment process of the debt structure of\ud our group of Nigerian listed companies is within the framework of a quadratic (a UShaped)\ud relationship as suggested by Kale et al. (1991). This implies that at the\ud average level of the change in total liability as a percentage of total assets is\ud nonlinearly correlated to business risk. In normal times when the threat of insolvency\ud is low, firms cut their average rate of borrowing relative to total assets by between 1\ud and 4 percent a year. However, they raise it by between 5 and 22 percent during\ud periods of heightened market anxiety. This suggests that policies which lower the\ud expected bankruptcy costs relative to company value will discourage an unnecessary\ud use of debt.
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