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

Description

Download Financial Structure and the Value of the Firm: A Cross-Sectional Industry Study of Nigerian Quoted Firms. Banking and Finance students who are writing their projects can get this material to aid their research work.

Abstract

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.

Introduction

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.

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