ABSTRACT
The study sought to examine the determinants of financial structure of
Nigeria quoted firms during the period spanning 1999 – 2014. The 15-year period
accommodated several time periods and data points. The study adopted ex-post
facto research design. The research work also adopted two theoretical
frameworks: Pecking Order and Static Trade – off theories captured in a panel
regression model. A sample of 24 firms was selected based on data quality and
availability to address the requirements of the variables in the model. Five
hypotheses were formulated and tested using Pooled Ordinary Least Squares (OLS)
multiple regression. Results show that profitability (PRT) had a positive and
significant impact on financial structure; tangible fixed asset (TAN) has a positive
and significant impact on financial structure of quoted firms; growth
opportunities (GRW) had a positive and significant impact on financial
structure of Nigerian quoted firms. Results of panel regression also indicate
that operating risk (volatility), (OPR) had a positive and statistically
significant impact on financial structure of listed firms in Nigeria. Finally,
firm size (FST) which is the natural logarithm of total assets had a positive
and significant impact on financial structure. Firm size was used to control
possible non-linearity and prevent problem of heteroskedasticity. These
findings are corroborative of theoretical and empirical predictions. For
instance, employing a high proportion of a long term debt in the financial
structure results in low profitability because short-term debts are less
expensive, but accessible to many firms. On the basis of the entire findings,
useful recommendations for optimal financial mix by managers as well as
measures to enhance the management of the Nigerian Stock Exchange were made.
For instance, reducing floatation costs insider abuses will enable firms to
access funds easily and increase investors confidence respectively.
CHAPTER ONE
INTRODUCTION
1.1
Background of the study
In some countries, governments often give
financial assistance to business firms to enable them to kick-start and sustain
their operations and overcome some teething problems. Such assistance takes
pre-eminence during economic recession which is often characterized by low
demand for goods and services occasioned by low level of income, falling Gross
Domestic Product (GDP), business failure and loss of jobs. The rationale for
governments’ action in this direction are legion: to prevent corporate failure
and its contagious effects; increase the Gross Domestic Product by producing
goods and services for local and international consumption; maintain a desired
level of employment and above all, encourage entrepreneurial development.
Financial and economic crises are known to have effects on financial
structure decision of firms. For instance, Deesomak, Paudyal and Pescetto
(2004) investigated the determinants of capital structure of Asia Pacific
region after the financial crisis that engulfed Thailand, Malaysia and
Singapore. The crisis which originated in Thailand, had a snowball effect on
the region’s capital markets severely, with outflows of foreign investments as
international investors become concerned with higher risk in the affected
countries. Raising capital in these countries became more costly because of
high risk premia, compounded by the high level of interest rates needed to
support local currencies (Deesomark, et al 2004). Grenville
(1999) and Chou and Ho (2002), reported that the Asian countries were
hit in different degrees by the crisis. This prompted researchers to conduct
research on determinants of capital structure across the affected countries
between the pre and post- crisis period to provide insights into firms’ financial
decision making. In the same vein Zoppa and McMahon(2009) compared Pecking
Order Theory with the financial structure of manufacturing SMEs in Australia.
Financing decisions have also been identified to have direct impact on
financial structure and performance of companies. See for instance, Gupta,
Srivastava and Sharma (2010), Chou and lee (2007), Schwarts and Aronsou (1979),
Booth, et al (2001), Pratheepkpanth (2001), Bas, Muradoglu and
Phylaktis (2009) and Booth, Alvazian and Demirguc – Kunt (2001).
Economic and financial crises are not alien to Nigeria especially
during the period spanning 1990 – 2008. See for instance, Dagogo and Ollor
(2009), Olo (1991), Uche (2000), Sanusi (2003) and Soludo (2004). In every
economy, the real and financial sectors complement each other in order to
maintain a progressive balance (Dagogo and Ollor, 2009).
A deficiency in one sector hampers growth and development in the
other. For instance, Sharpe, Alexander and Bailey (1995) argued that there
exists a strong relationship between highly developed financial sector and real
sector investment. In Nigeria, however, evidence shows that both sectors are
not so symbiotic such that the financial sector milk – dries the real sector. Thus, funds meant for real sector development
are channeled to non-productive sectors. Soludo (2004) and Sanusi (2003) observed that banks declare huge
profits even as factories close down, simply because Nigeria banks were less
responsible to long-term financing than they were to short–term trade financing
and foreign on exchange deals.
Dagogo and Ollor (2009), have observed that the failure of previous
financial policies of government to achieve desirable economic growth was a
concern that demands restructuring of the Nigerian system, especially in the
glare of an ailing economy. Thus, the introduction of the Structural Adjustment
Programme (SAP) in 1986 and the privatisation programme in 1989 were in
response to failed institutional measures to promote growth in the industrial
sector. Uche (2000) is of the view that SAP was designed to achieve balance of
payment viability by altering and restructuring the production and consumption
patterns of the economy, eliminating price distortions, reducing the heavy
dependence on consumer goods, imports and crude oil exports, enhancing the
non-oil export base, rationalising the role of the public sector, accelerating
the growth potential of the private sector and achieving sustainable growth. To
achieve these objectives, the main strategies of the programme were the
adoption of a market exchange rate for the Naira, the deregulation of external
trade and balance of payment arrangements, reduction in the price and
administrative control and more reliance on market forces as a major determinant
of economic activity. In the same vein, Ojo (1991) pointed out that
government’s reasons for deregulation of the economy were legion: stagnant
growth, rising inflation, unemployment, food shortage and mounting external
debt.
The corporate sector remains the engine
room of growth and development of all economies. Abor (2008) observed that
corporate sector growth is vital to economic development.
While acknowledging the role of small and medium scale enterprises in
the Nigerian economy, Yerima and Danjuma (2007) pointed out that these
enterprises have been identified as the means through which rapid
industrialization, job creation, poverty alleviation, and other developmental
goals are realized. Again, Abor (2008) asserts that it is imperative for firms
in developing countries to be able to finance their activities and grow
overtime if they are ever to play an increasing and predominant role in
providing employment as well as income in terms of profits, dividends and wages
to households. Firms earn economic gains or rents from strategic assets which
are financed by debt or equality. Kochhar (1997) affirms that strategic assets
provide a firm with a source of steady stream of rents so that it gains a
sustained competitive advantage over its rivals. Thus, it is the stock of
strategic assets that is important in determining a firm’s profitability level.
Increasingly, business people are seeking to manage companies in a
strategic manner. The strategic model of the firm argues that improved firm
performance occurs when the firm’s managers select strategic goals and all of
the activities of the firm are directed towards meeting those goals. Therefore,
the financial strategy of the firm should be consistent with the firm’s
strategic objectives (Prasad, et al,1997).
Again, Kochhar (1997) asserts that the nature of the firm’s assets
predicts efficient ways of organising transactions. Varying characteristics of assets imply different levels of
optimal capital mix of debt and equity. If the transactions with suppliers of
finance are not organised as per these predictions, the ability of firms to
obtain a competitive advantage over their rivals maybe impaired (Hennart,
1994).
It suggests, therefore that the capabilities in managing financial
policies are important if a firm is to realise gains from its specialized
resources; poor capital structure decisions lead to a possible reduction/loss
in the value derived from strategic assets (Kochhar, 1997).
In the presence of uncertainty, bounded rationality and opportunism,
contracts that completely safeguard an investment cannot be designed. This
leads to organising costs for the firm, as is the case for other economic
activities. These organising costs are a function of the institutional and
environmental constraints (Williamson, 1991). It is important to note that
different countries have different institutional arrangements, mainly with
respect to their tax and bankruptcy codes, the existing market for corporate
control and the roles banks and securities markets play (Pratheepkpanth, 2011).
The choice between two governance structures depends on the
comparative costs for organising a particular transaction, for instance,
financing a particular investment (Kochhar, 1997). As Williamson (1991) argued,
it is the characteristics of assets under consideration that affect costs under
alternative governance structures. Alternative governance structures are
referred to debt and equity. The variation in the benefits of the two
instruments and their ability to monitor and evaluate managerial actions
according to Berglof (1990) and Williamson (1988) imply that debt and equity can be
considered as alternative governance structures. A firm has the option to
choose either one when financing a new investment. The debt-to-equality ratio,
therefore is the result of transactions with potential debt-holders and
equality holders. These transactions come about with the formation of explicit
or implicit contracts that delineate the benefits and resource available to the
suppliers of finance (Jensen and Meckling, 1976). The benefits available
represent the property rights due to their claims over the return streams (from
the assets). This recourse available is in the form of their control rights
over management actions (Kochhar, 1997)....
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Item Type: Ph.D Material | Attribute: 201 pages | Chapters: 1-5
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