THE CHOICE BETWEEN EQUITY AND DEBT IN NIGERIAN QUOTED COMPANIES SOME EMPIRICAL TESTS OF THE CAPITAL STRUCTURE THEORY
The study of capital structure attempts to explain the mix of securities and financing sources used by corporations to finance real investment. Most of the researches are on industrialized economies and evidence on developing countries like Nigeria remain scanty. This study, which attempts to fill the void or contribute to filling it, investigates and empirically analyses the application of the capital structure theory to the Nigerian situation. capital structure models, such as the pecking order and trade-off theories, were specifically applied using data from annual financial reports of sixty quoted firms over a ten-year period, 1996 to 2005, as well as the Nigerian Stock Exchange (NSE) publications. The study utilized correlation and regression analyses as well as an autoregressive distributive lag (ADL) model to test for capital structure adjustment and other related issues. The study showed that market leverage is a decreasing function of marginal tax rate, growth options, capital market conditions, collateral, profitability and earnings volatility; and an increasing function of size and profitability attained Statistical significance with meaningful theoretical explanation. The cross-sectional behaviour of most of the explanatory variables was unstable over time. Overall, the empirical evidence obtained confirms the theoretical predictions of the pecking order and trade-off models though more evidence exists to validate the former theory. Further, we find that the tax benefits of debt are about 14.6 per cent of firm value. The implications of these results are discussed. In particular, managers of firms seem to be concerned about the value of tangible assets, firm size and profitability in their financing decisions. Finally, our results confirmed the targets-adjustment hypothesis of capital structure: Nigerian quoted firms engage in dynamic rebalancing of capital structure toward their target debt ratios. The major contribution of this study is the applications of our theory, a modified version of the standard pecking model. We recommend among others that profitable firms in greater tax brackets should borrow more to maximize the tax shield benefit. This thesis therefore sends some signals on the need for both the lending institutions and the financial system regulators to review the corporate financing operations. it also recommends, among others that further studies should investigate the issue of adjustment costs on capital structure.