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Financial Structure and the Value of the Firm: A Cross-Sectional Industry Study of Nigerian Quoted Firms



Financial Structure and the Value of the Firm: A Cross-Sectional Industry Study of Nigerian Quoted Firms.


The controversy over the optimal capital structure question focuses on the effect of the addition of non-equity financing on the quality of the firm’s earnings and on the rate at which the earnings are capitalized. Theory posits that capital structure of a firm affects its shareholders‘ return and risk, and consequently, the market value of shares, hence its significance in corporate financing decisions.

This study therefore empirically examines the impact of financial structure decision on the value of Nigerian quoted firms. Cross-sectional time series data of 72 Nigerian quoted firms, for the 1997-2007 periods, were collated from the published annual reports and accounts of the companies, and from the Nigerian Stock Exchange Fact Books of the same period.

Five hypotheses were proposed for the study, while the ordinary least square (OLS), fixed-effects (FE) and the gerneralised least square (GLS) regression were used on pooled and panel data to validate the hypotheses and to estimate the relationship between financial leverage and the different measures of firm value in Nigeria.

The normalised values of earnings per share (EPS), profit after tax (PAT), price earning ratio (P/E ratio), earnings yield and dividend yields were used as the regressands; while total, long-term and short-term leverage measures alongside size and growth were used as regressors. Descriptive statistics on both the regressands and the regressors were also computed to complement the regression results.


Title Page i

Certification ii

Approval page iii

Dedication iv

Acknowledgements v

Abstract vii

Table of Contents viii

List of Tables xii

List of Figures xiii

Chapter One


1.1 Background of the Study 1

1.2 Statement of Research Problem 6

1.3 Objectives of the Study 9

1.4 Research Questions 9

1.5 Research Hypotheses 9

1.6 Scope of the Study 10

1.7 Significance of the Study 11

1.8 Limitations of the Study 12

1.9 Operational Definition of Terms 13

References 14

Chapter Two


2.1 Financial Structure: a Theoretical Overview 18

2.1.1 Traditional View 19

2.1.2 Static Trade-off Hypothesis 20

2.1.3 Dynamic Tradeoff Hypothesis 22

2.1.4 Pecking Order Hypothesis 24

2.1.5 Neutral Mutation Hypothesis 27

2.1.6 Agency Theory 29

2.1.7 Signalling Hypothesis 32

2.2 Ownership Structure and Corporate Financial Leverage 34

2.3 Influence of Financial Structure on the Firm (the Irrelevance Hypothesis) 38

2.4 Influence of Financial Structure on the Firm (the Positive Hypothesis) 42

2.5 Financing and Debts 45

2.6 Optimality in financial Structure 46

2.7 Determinants of Financial Structure 52

2.8 Financial Structure in Developing Countries 61

2.9 Financial Structure and Firm value: An Empirical Overview 69

2.10 Financial Structure and Economic Growth: A Finance and Growth Perspective 76

2.11. Nigeria Corporate Environment 84

2.11.1 The Structure of Nigeria Financial System 85

2.11.1a Nigerian Money Market 85

2.11.1b Central Banking in Nigeria 87

2.11.1c Operators in the Nigerian Money Market 93

2.11.2 The Nigerian Capital Market 95

2.11.2a Securities and Exchange Commission 96

2.11.2b Nigerian Stock Exchange (NSE) 102

2.11.3 The Macro economic financial structure (a Descriptive Analysis). 102

2.11.4 Nigerian Tax System (A Historical Overview of Nigeria Taxes) 104

2.11.5 Investment Incentives 109

2.11.6 Administration of Incentives 110

2.11.7 Corporate Governance in Nigeria 112

2.11.7a Laws and Regulations Governing Corporate Practices in Nigeria:

An Overview 115

2.11.7b The Structure Of Nigerian Corporations 116

2.12 Summary of Review 117

References 119

Chapter Three 132


3.1 Research Design 132

3.2 Sources of Data 133

3.3 Population and Sample Size 134

3.4 Description of Research Variables 136

3.4.1 Dependent Variables 136

3.4.2 Justification for the Use of Dependent Variables 138

3.4.3 Explanatory Variables 139

3.5 Techniques of Data Analysis 141

3.6 Hypothesis Test Models 143

3.7 Other Tests 145

References 146

Chapter Four

4.0 Data Presentation and Analysis 148

References 192

Chapter Five

5.0 Discussion of Regression Results and Test of Hypotheses 193

5.1 Introduction and Hausman Test 193

5.2 Regression Results and Hypotheses Validation 194

5,2.1 Relationship between Financial Leverage and Profit after Tax 194

5.2.2 Relationship between Leverage and Earnings Yield 199

5.2.4 The Relationship between Dividend Yield and Leverage 203

5.2.5 The Relationship between Price Earnings and Leverage 208

5.2/6 The Relationship between Leverage and Earnings per Share 211

5.3 Summary of Regression Discussions and Validation of Hypotheses 215

Chapter Six

6.0 Summary of Findings, Conclusions and Recommendations 219

6.1 Summary of Findings 219

6.2 Conclusion 221

6.3 Recommendations 222

6.4 Contribution to Knowledge 223

6.5 Recommended Areas for Further Studies 224

References 225

Bibliography 226



One of the central issues in both the theory and practice of financial management is the problem of determining the optimal capital structure of the firm. Given capital market conditions and the array of investment opportunities, is there some optimal composition of liabilities and equity at which the value of the firm will be maximized? (Wippern, 1966).

Extant theories of capital structure and financing decisions of firms suggest that there is an optimum financial structure, upon which a firm maximizes her value (Myers, 1984; Masulis, 1983; Taggart, 1977; Miao, 2005; Wippern, 1966; Miller, 1977).

They also suggest that debt-equity mix has implications for the shareholders‘ earnings and risk, which in turn, affects the cost of capital and the market value of the firm (Pandey, 2002).

The composition of the various means by which a firm is financed is known as the financial structure of that firm (Pandey, 2002). A revision of the financial structure could be achieved by increasing creditors‘ claims, issuing more equities or retaining earnings.

The difference between financial structure and capital structure lie in the tenor of the fixed commitment financing. Traditionally, short-term borrowings are excluded from the list of methods of financing a firm‘s capital expenditure (Pandey, 2002).


Abor, J (2005), ―The Effect of Capital Structure on Profitability: an Empirical Analysis of Listed Firms in Ghana‖, The Journal of Risk Finance 6(5): 438-445.
Elkelish, W.W and A. Marshall (2007), ―Financial Structure and Firm Value: Empirical Evidence from the United Arab Emirates‖, International Journal of Business Research.
Long, M., & Maltiz, I. (1985). ―The Investment-Financing Nexus: Some Empirical Evidence‖. Midland Corporate Finance Journal, 3: 53–59.
Marsh, P. (1982). ―The Choice Between Equity and Debt: An Empirical Study‖. The Journal of Finance, 37: 121– 144.
Masulis,R.W (1983), ―The Impact of Capital Structure Change on Firm Value: Some Estimates‖, The Journal of Finance XXXVIII (1): 107-126.
Modigliani, F. F., and M. H. Miller (1958), ―The Cost Of Capital, Corporation Finance And The Theory Of Investment‖, American Economic Review, 48, 267– 297.
Myers, S (1984), ―The Capital Structure Puzzle‖, Journal of Finance 39: 575-592.

CSN Team.



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