Determinants of Capital Structure and Speed of Adjustment in Nigerian Non-financial Firms

Abstract

The study aims to examine the capital structure determinants and SOA of all listed, non-financial firms in Nigeria. The objectives are; to investigate the relationship between firms’ characteristics and the capital structure choice among non-financial firms listed in the Nigerian Stock exchange, to examine whether the financial crisis affected capital structure determinants. The study also examines the speed of leverage adjustment (SOA) of Nigeria non-financial firms and the impact of the financial crisis on the SOA.
The trade-off and pecking order theories are employed as the main theories to explain firms’ financing decisions in Nigeria. Other theories used are signalling, agency and market-timing theories due to their contribution to the capital structure debate. This study used three different types of leverage as dependent variables, which are scaled against total assets. The explanatory variables are profitability, asset tangibility, firm size, firm growth, firm age, business risk and liquidity. It also uses dynamic capital models to identify capital structure determinants and SOA. The current study applied the two-step GMM system estimation.
The result shows 63% SOA for listed non-financial firms in Nigeria. SOA is also faster after the financial crisis when compared to the pre-crisis situation. Furthermore, the study shows the impact of the financial crisis on SOA of long-term and short-term leverage.
Firm characteristics are found to be capital structure determinants of non-financial firms in Nigeria. Asset tangibility and firm growth are positively related with both long-term and short-term leverage and highlight the importance of collateral in financing decisions of Nigerian non-financial firms. Profitability shows a negative and significant relationship with short-term leverage but is positively related with long-term leverage. Firm size and age show a negative and significant relationship with the long-term and short-term leverage. The coefficient signs of most independent variables confirm the dominance of the pecking order theory in Nigerian firms’ financing behaviour. This study contributes to knowledge by providing evidence of a moderate speed of adjustment among Nigerian non-financial firms. It shows also that firm characteristics are determinants of long-term and short-term leverage in Nigeria.