Capital Structures in Nigerian Firms - Patterns Determinations, Adjustments, Optimality and Costs.

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Adedipe, S. A.
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University of Lagos
This study is an attempt to extend the frontiers of knowledge about company finances, with particular empirical reference to Nigeria. It examines the extent to which Nigerian firms use owners' funds (equity) and borrowed funds (debt). It covers a period of 10 years, from 1974 to 1983. The study samples 87 non-financial companies quoted on the Nigeria Stock Exchange; the sample excludes the financial sector because its financing patterns sharply differ from those of the other sectors of the economy. There are three parts to the study. The first part is the detailed review of the theory of optimal capital structure and the extensions made to it; the second part is the presentation of the observed patterns of financing, while the third part comprises four areas that are concerned with the empirical investigation of the importance (or optimality) of capital structure, the adjustment of capital structure, and the relevance of capital costs to the capital structures of the sampled firms. In this study, capital structure is defined as the ratio of total debt to total assets at book values.The major empirical findings of the study are as follows, with reference to the areas of investigation enumerated above. (i) The observed patterns of financing confirm that Nigerian firms use debt more than equity, with emphasis on short-term debt which accounts for 51 per cent of total financing. However, the trend analysis shows a slight tendency towards substitution of equity for debt. The capital markets and banks are not the primary source of funds. Generally, Nigerian firms rely more on trade credits and other non-bank liabilities. (ii) There is a suggestion of economy-wide range of optimal capital structures (i.e. debt ratios at which the value of the firm is maximized), while capital structure and the determinants of the optimal capital structure of not significantly differ within industries. The evidence is inconclusive in a test of capital structure differences between industries, and hence the existence of (industry-related) optimal capital structures in Nigerian firms is yet unresolved. (iii) Five factors are found to have significant influence on the proportion of total assets, financed by debt. These factors are the target debt ratio, company size, dividend payout ratio, degree of operating leverage, and average return on investment. (iv) Changes (over time) in capital structures in Nigerian firms are systematic - as if the companies want to move the values of their debt ratios to some target levels. Debt ratios are, indeed, adjusted to targets defined as industry averages and firm historical averages, with adjustment coefficients ranging between 0.002 and 0.970. The speeds of adjustment (i.e. rates of change of the adjustment coefficients over time) show that Nigerian firms adjust quickly to their target debt ratios. In addition to the target factor, capital structure changes are also influenced by company size and asset composition. (v) The post-tax cost of debt of Nigerian firms, is 6.1 per cent, whilst the cost of equity capital is 7 percent. The combination of the pre-tax cost of debt (11 per cent) and the cost of capital of 9 per cent to Nigerian firms, and a marginal cost of 6.2 per cent. Corporate capital structures in Nigeria are fairly cost elastic, although the influence of cost is found to be statistically insignificant. Also there are no scale economics in the costs of capital structures in Nigerian firms, while no industry influence was found on the cost of debt.
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Capital structure , Nigerian Firms
Adedipe, S. A. (1988), Capital Structures in Nigerian Firms -Patterns Determinations, Adjustments, Optimality and Costs. University of Lagos School of Postgraduate Studies Phd Thesis and Dissertation Abstracts, 437pp