Capital structure and business risk in Nigeria : evidence from a panel data analysis

Mohammed, D

Abstract

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

Citation

Mohammed, D. Capital structure and business risk in Nigeria : evidence from a panel data analysis. (Thesis). Salford : University of Salford

• Thesis Type: Thesis
• Deposit Date: Oct 3, 2012
• Award Date: Jan 1, 2010