DETERMINANTS OF CAPITAL STRUCTURE IN NIGERIA DEPOSIT MONEY BANKS

By

HUSSAINI SHUAIBU
MSC/ACC/SMS/01408/2014-2015

BEING A THESIS PROPOSAL SUBMITTED TO THE DEPARTMENT OF ACCOUNTING,

KADUNA STATE UNIVERSITY IN PARTIAL FULFILMENT FOR THE AWARD OF
MASTERS OF SCIENCE (M.Sc) DEGREE IN ACCOUNTING AND FINANCE

DEPARTMENT OF ACCOUNTING FACULTY OF SOCIAL MANAGEMENT SCIENCE

KADUNA STATE UNIVERSITY

MAY, 2016

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 SECTION ONE

INTRODUCTION
1.1 Background to the Study

The capital structure decision is at the center of many other decisions in the area of corporate

finance. One of the many objectives of a corporate financial manager is to ensure low cost of capital

and thus maximize the wealth of shareholders. Hence, capital structure is one of the effective tools

of management to manage the cost of capital. An optimal capital structure is reached at a point

where the cost of the capital is minimal ( Fisseha 2010).

The Capital Structure is the combination of debt, equity and other sources of finance that it used by

firms and other institutions to fund its long term asset. The key division in capital structure is

between debt and equity. The proportion of debt funding is measured by gearing or leverages.

There are different factors that affect banks capital structure, as such banks should attempt to

determine what its Optimal, or best mix of financing (Akhtar, Husnain & Muktar, 2014). Capital

structure is used by investors to assess how banks finance its asset to ascertain the level of risk they

can assume. Profitability is one of the major constituent of valuing firm’ performance, but how

banks capital structure is being mix is also very important in knowing the likelihood of bankruptcy

of the banks. The optimal capital structure should be the one that can reduce the tendency of banks

falling into bankruptcy problem.

The optimal level of capital structure is not static, the optimal capital structure evolves persistently

and successful corporate leaders must constantly consider factors such as the company and its

management, the economy, government regulation and social trends, the state of capital markets,

and industry dynamic (Handoo & Sharma 2014).The peculiarity of banking operation and it

uniqueness suggest a variation in it determinant of capital structure in comparison to other financial

and non-financial institutions. Evidently, banking sector constitutes the largest portion of financial

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institutions in Nigeria and by extension the engine room for economic growth. Legal capital

regulation is the single most important factor in determining the capital structure of the banking

sector.

The nature of banking sector necessitated that bank should hold more than the legal capital required

by the regulatory body, this is to safe guard against future uncertainty and absorb any unforeseeable

circumstance. Financial and other institutions do not operate in vacuum, or isolation from it

immediate and larger environment as such both micro and macro elements can influence it

determinant of capital structure. In Nigeria, banks seem not to have reached the optimal level of

capital structure despite several capitalization and recapitalization requirement by the regulatory

body, evidently from incessant failure in banking sector. It is essential for both the providers of

capital and the firm itself to find the right mix of debt and equity financing in order to optimize it

operation. Many developing countries have experienced banking problems requiring major reforms

to address weak banking supervision and inadequate capital. It has been shown that in addition to

deposit insurance (implicit or explicit), official capital structure regulations play a crucial role in

aligning the incentives of bank owners with depositors and other creditors (Berger, Herring &

Szego, 1995).

Size is considered a very important variable when it comes to the study of determinant of capital

structure though the relationship between size and leverage is mixed. For the Static trade-off

approach, the larger the firm, the greater is the possibility that it can issue debt there by resulting in

an existence of a positive relationship between debt and size. One of the reasons for this is that the

larger the firm the lower is the risk of bankruptcy, (Titman and Wessels, 1988).With respect to the

Pecking order theory,( Rajan and Zingales 1995) argued that this relationship could be negative.

There is less asymmetrical information about the larger firms, reducing the chances of under

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valuation of the new equity issue, encouraging large firms to use equity financing. Based on the

pecking order theory assertion, this means that there is a negative relationship between size and

leverage of the firm.

There are controversies about the relationship between firm growth rate and leverage, however

agency cost theory and pecking order theory explain the contradictory relation between the growth

rate and capital structure. Agency cost theory suggests that equity controlled firms have a tendency

to invest sub-optimally to expropriate wealth from the enterprises bondholders. The agency cost is

likely to be higher for enterprises in growing industries which have more flexibility in their choice

of future investment. Hence, growth rate is negatively related with long-term debt level (Jensen

and Meckling, 1976). Pecking order theory, contrary to the agency cost theory, shows the positive

relation between the growth rate and debt level of enterprises. This is based on the reasoning that a

higher growth rate implies a higher demand for funds, and, ceteris paribus, a greater reliance on

external financing through the preferred source of debt (Sinha 1992). For, pecking order theory

contends that management prefers internal to external financing and debt to equity if it issues

securities (Myers 1984). Thus, the pecking order suggests the higher proportion of debt in capital

structure of the growing enterprises than that of the stagnant ones.

Age of a firm is the standard measure of reputation in capital structure model, as a firm continues

longer in business, it establishes for itself reputation and goodwill and therefore increases its

capacity to take on more debt, hence age is positively related to debt. Before granting a loan, banks

tend to evaluate the credit worthiness of entrepreneurs, this may include assessing it years of

existence, when it comes to highly indebted companies, they are essentially gambling with their

creditor’s money. If the investment is profitable, shareholders will collect a significant share of the

earnings, but if the project fails, then the creditors have to bear the consequences (Myers, 1977). To

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overcome problems associated with the evaluation of credit worthiness,( Diamond 1984) suggests

the use of firm reputation. He takes reputation to mean the good name a firm has built up over the

years, the name is recognized by the market, which has observed the firm’s ability to meet its

obligations in a timely manner

The profitability of firms implies higher debt capacity and less risky to the debt holders. So, as per

static-trade–off theory, capital structure and profitability are positively associated. But pecking

order theory suggests that this relation is negative. Since, as stated earlier, firm prefers internal

order financing and follows the sticky dividend policy. If the internal funds are not enough to

finance financial requirements of the firms, it prefers debt financing to equity financing (Myers

1994). Thus, the higher profitability of the enterprise implies the internal financing of investment

and less reliance on debt financing.

It is argued that a firm having a large amount of fixed assets can easily raise debt at cheaper rates

because of the collateral value of those fixed assets (tangibility). Firms with a higher ratio of

tangible assets have an incentive to borrow more because loans are available to them at a relatively

cheaper rate. Therefore a positive relationship between tangibility of assets and firm’s leverage is

expected. (Titman and Wessels 1988) and (Harris and Raviv 1991) argue that tangibility might be

the major factor in determining the firm’s debt levels. If debt is secured against assets, borrower is

restricted to using loaned funds for a specific project, and creditors have an improved guarantee of

repayment. Thus, firms with high level of fixed assets would have higher level of debt.

Interest rate is the cost of borrowing for the firm, when a bank has the capacity to pay interest on

the borrowed amount this may entice the bank to take advantage of lower interest to apply for more

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debt, taking advantage of the lower rate, so also when the interest rate is high bank may tend to

result to using more of equity financing and avoid new debt.

Therefore the focus of the study is to investigate the determinant of capital structure, namely: firm

size, growth, age, tangibility, interest rate and return on investment, in Nigeria deposit money bank

from 2004 to 2015. This is not accidental rather incidental as the year 2004 was the year of

monumental recapitalization that saw the banks moving from 2 billion naira to 25 billion naira

capital base , this increment in capital base stimulate activities in the capital market as banks jostle

between primary and secondary market to increase capital .

1.2 Statement of the Problem

One of the many objectives of a corporate financial manager is to ensure low cost of capital and

thus maximize the wealth of shareholders. Hence, capital structure is one of the effective tools of

the cost of the capital is minimal. But the questions that remain unanswered are “what are the

potential determinants of capital structure and do companies choose their capital structures”?,

empirical researches have attempted to provide answers to these questions. Based on the research

made by( Myers 1984), it is stated that each of the theories on capital structure applied are based on

certain circumstances as such, the theories are not designed to be general rather they are conditional

theories of capital structure, each of which emphasizes on certain costs and benefits of alternative

financing strategies. Different theories answer this question from different points of view. There

has been an outpouring of empirical researches trying to compare and contrast the predictive power

of some capital structure theories, usually formulated as a contest between the trade-off theory,

agency theory and pecking order theory (Aremu, Ekpo, & Mustapha, 2013). The empirical evidence

by these researchers , Bassey, Arere & Okpukpara (2014), Onaolapo, Kajola & Nwidobie (2015),

Chandrasekharan (2012), Anthony & Odunayo (2015), Chechet, Garba & Odudu (2013), Bassey,

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Arere & Akpaeti (2013) ), Aremu, Ekop & Mustapha (2013) , Iwarere & Akinleye (2010), Iwarere

& Akinleye (2010), Barine (2012), Ogbulu & Emini (2012) and Igbinoso & Chijuka (2014) came

up with mix findings as some studies support trade-off theory, other studies support pecking order

theory. In essence, there are divergent opinions in terms of theoretical view and empirical findings

as to what determines a firm’s capital structure.

Moreover, studies in Nigeria on determinants of capital structure paid little attention to banking

sector despite the pivotal role played by bank in economical growth , researches on the

determinants of capital structure were directed mainly to non-banking sector, they generally restrict

their analysis to non-banking sectors on the Nigerian stock exchange. While the peculiarity of

banking operation and it uniqueness suggest a variation in it determinant of capital structure in

comparison to other financial and non-financial institutions. Evidently, banking sector constitutes

the largest portion of financial institutions in Nigeria and by extension the engine room for

economic growth.(based on the literature reviewed), Aremu, Ekop & Mustapha (2013) and Iwarere

& Akinleye (2010), where the only studies that concentrated on banking sector. And it is a known

fact that banking sector serves as an engine of growth in any economy and they follow the same

manner as other non-financial firms to raise capital through combination of equity and debt.

Therefore, it is not out of place to investigate the determinants of capital structure of deposit money

banks in Nigeria. This is for the fact that in spite that a minimum capitalization of 25 million naira

has been imposes by CBN on commercial banks yet, the regulatory framework did not specifjically

stipulate the proportion of debt and equity ratio (capital structure). The regulatory framework only

provided what the banks should have as a minimum capital, according to ( Aremu, Ekpo, &

Mustapha, 2013). There is no empirical study that support the imposition of capital requirement on

bank. This creates a disjoint between theory and what is obtainable in practice.

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This Study on the determinants of capital structure of firms in Nigeria is aimed at enhancing the

quality of literature of financing decision by reviewing and updating literature from the following

perspective, methodological gap , variable gap as well as period gap, for example, Bassey, Arere &

Okpukpara (2014), Onaolapo, Kajola & Nwidobie (2015), Chandrasekharan (2012), Anthony &

Odunayo (2015), Chechet, Garba & Odudu (2013) and Bassey, Arere & Akpaeti (2013) studied the

determinants of capital structure of firms in Nigeria using panel data. They all employed ordinary

least square regression as a technique of data analysis while in real sense, it does not recognize

panel effect. The data for the study is panel in nature (that is cross-sectional time-series data). Panel

data lead to errors that are clustered and possibly correlated overtime. This makes the use of OLS

regression not only inadequate but rather making their findings unreliable and misleading. As

Iwarere & Akinleye (2010) and Barine (2012) used questionnaire; Ogbulu & Emini (2012) and

Igbinoso & Chijuka (2014) used cross-sectional data to investigate the determinants of capital

structure in Nigeria. Moreover, the fact that some of these studies were conducted recently, the

period covered by the studies is not up to 2011. Therefore, this study seeks to take wider range

period as well as extending the period of the study to 2015, i.e. 12 years (2014-2015) and above all,

all the researchers conducted on capital structure fail to acknowledge the macro aspect of the

determinant of capital structure in Nigerian money deposit banks in Nigeria.

To the best of the best of the researcher’s knowledge empirical evidence did not yet firmly reject

the view that banks hold the regulatory minimum plus. Moreover, there are divergent opinions in

terms of theoretical view and empirical findings as to what determines a firm’s capital structure.

Like most other developing countries, the area of capital structure is relatively unexplored in

Nigeria. This is because, most of the Nigerian based studies focus on micro variables (usually firms’

specific characteristics) that influence capital structure. This study will be built on the prior

researches by adding macro variable-interest rate as a determining factor and also a wider time

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frame from 2004-2015. Therefore, the study would focus on factors that determine capital structure

of deposit money banks in Nigeria.

1.3 Objectives of the Study

The major objective of the study is to investigate the determinants of capital structure of Deposit

money banks in Nigeria, while the specific objectives are to:

i. Examine the effects of firm size on capital structure of listed deposit money banks in

Nigeria.

ii. Determine the impact of firm growth on capital structure of listed deposit money banks in

Nigeria.

iii. Investigate the effect of firm age on capital structure in listed deposit money banks in

Nigeria ,

iv. Assess the extent to which tangibility affect capital structure of listed deposit money banks

in Nigeria

v. Find out the impact of return on asset capital structure of listed deposit money banks in

Nigeria.

vi. Explore the impact of interest rate on capital structure of listed deposit money banks in

Nigeria.

1.4 Hypotheses of the Study

Based on the stated objectives, the study would test the following null hypotheses:

H01: Firm size has no significant impact on the capital structure of listed Deposit money banks in

Nigeria

H02: Firm growth does not have significant effect on leverage of listed deposit money banks in

Nigeria

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H03: There is no significant influence of firm age on leverage of listed deposit money banks in

Nigeria.

H04: Tangibility has no significant impact on leverage of listed deposit money banks in Nigeria

H05; Return on Asset has no significant impact on leverage of listed deposit money banks in

Nigeria.

H06:: Interest rate does not have significant effects on leverage of listed deposit money banks in

Nigeria

1.5 Scope of the Study

The study will focus on finding the determinants of capital structure in the Nigerian deposit money

banks only. Therefore, the independent variables will be firm size, firm growth, firm age,

tangibility, return on asset and interest rate , while the dependent variable will be leverage. The

study is expected to cover the period of 2004 to 2015. The impact of these variables of the study

will be tested using secondary data that will be extracted from the banks financial statement.

1.6 Significance of the Study

Since banking industry remain the largest sector of Nigeria financial sector, assessing the factors

determining capital structure decision will help concerned parties innovate actions that can fortify

their competitive position in the industry. This study, therefore, apart being a step for the

researcher’s educational career has the following immense importance, this is the first attempt to

the best of the researcher’s knowledge to view capital structure from the combination of both macro

and micro perspective , in addition ,though there are a lot of researches related to the area of capital

structure decisions , those that are concerned with capital structure in banking sector of developing

countries are few. This study, therefore, contribute to the literature by assessing the capital

structure decision determining firm specific factors of money deposit banks in the developing

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countries like Nigeria. Second, the study will have great importance to external investors and

shareholders bank managers, lenders and policy makers in making knowledgeable decisions and

regulations considering the financing patterns of the banking sector in Nigeria. Also the study

notably contributes to other studies to be made in different economic sectors by providing potential

factors determining capital structure decisions of commercial banks it could also serve as a

reference point for other researches.

The finding of this research may be useful in broadening the horizon for major players, such as

bank managers, financial analysts, policy makers and all stake holders in the banking sector in

knowing the key determinant of capital structure. It is expected to effect change in minimum capital

imposition on money deposit banks by regulatory authority (CBN). It is also expected serve

as an additional literature and basis of validating theory.

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 SECTION TWO

LITERATURE REVIEW

2.1 Introduction

This section reviews literature relevant and related to the problems of our study. The review covers

conceptual issues related to capital structure and its determinants. The theoretical framework

relevant to the study will also be discussed. All these were done to identify a gap in the literature to

justify the need for the research.

2.2 Conceptual Framework of Determinants of Capital Structure

Brealey and Myers (1991) defined capital structure as comprising of debt, equity or hybrid

securities issued by the firm. Van Horn (1989) defined capital structure as the proportion of debt to

the total capital of the firms. Pandey (2005) defined capital structure as a choice of firms between

internal and external financial instruments. From the foregoing, the capital structure represent the

way firms finance its asset for continuing operation. According to Song (2005) capital structure is a

mix of a company's long-term debt, specific short-term debt, common equity and preferred equity.

The capital structure is how a firm finances its overall operations and growth by using different

sources of funds.

Capital structure also refers to the blend of debt and equity a company uses to fund and finance its

operations. In many cases, discussions of capital structure include references to debt-to-equity

ratios, which are one of several ratios that measure the relative weight of different types of capital.

Different types of capital impose different types of risks on a company. For this reason, capital

structure affects the value of a company, and therefore much analysis goes into determining what a

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company's optimal capital structure is. The Modigliani and Miller propositions (created by financial

theorists Franco Modigliani and Merton Miller) address this question.

In a company's capital structure, equity consists of a company's common and preferred stock plus

retained earnings, which are summed up in the shareholders' equity account on a balance sheet. This

invested capital and debt, generally of the long-term variety, comprises a company's capitalization

and acts as a permanent type of funding to support a company's growth and related assets.

In general, analysts use three different ratios to assess the financial strength of a company's

capitalization structure. The first two, the debt and debt/equity ratio are popular measurements;

however, it's the capitalization ratio that delivers the key insights to evaluating a company's capital

position.

The debt ratio compares total liabilities to total assets. Obviously, more of the former means less

equity and, therefore, indicates a more leveraged position. The problem with this measurement is

that it is too broad in scope, which, as a consequence, gives equal weight to operational and debt

liabilities. The same criticism can be applied to the debt/equity ratio, which compares total

liabilities to total shareholders' equity. Current and non-current operational liabilities, particularly

the latter, represent obligations that will be with the company forever. Also, unlike debt, there are no

fixed payments of principal or interest attached to operational liabilities.

Song (2005) sees capital structure as the mix of different types of securities (long-term debt,

common stock, and preferred stock) issued by a company to finance its assets. A company is said to

be unleveraged as long as it has no debt, while a firm with debt in its capital structure is said to be

leveraged. There exist two major leverage terms: operational leverage and financial leverage. While

operational leverage is related to a company’s fixed operating costs, financial leverage is related to

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fixed debt costs. Loosely speaking, operating leverage increases the business (or the operating) risk,

while financial leverage increases the financial risk.

The way and manner firms mix its asset and its influence on firms’ value has become a subject of

debate since 1960s. The Modiglini and Miller model started by debating that the market value of

any firm is independent of its capital structure, based on the premise that capital structure does not

affect a firm’s cash flow (Kyereboah, 2007). When interpreted, the arguments shows that the capital

structure is not expected to vary from company to company. Barclay & Smith (2005), following on

their preceding 1995 and 1999 papers, justify this “invariance” argument by trying conditions could

be deliberately artificial and could be excluding information costs, personal or corporate taxes,

contracting or transaction costs, and a fixed investment policy.

In 1963 Modigliani and Miller revised their initial stance that the financing decisions of firms do

not affect their value, suggesting that firms with higher profits should use more debt, thus

substituting debt for equity to take advantage of interest induced tax shields. Kyereboah-Coleman

(2007) Myers (1984) as advancing the static trade-off theory. The theory explains how a firm

decides on the debt-to-equity ratio on the assumption that some optimal capital structure exist,

enabling the firm to operate efficiently and ensuring external claims on cash flow are reduced.

Miller (1988) contend this is to imply that firms are encouraged to increase their debt levels. For

this reason, Voulgaris . (2004) argue that a trade-off between tax gains and increased bankruptcy

costs increases a firm’s cost of capital. In highlighting limitations to optimal level of firm debt,

voulgaris .consider the arguments of the stiglitz (1974) and (1998) paper; that bankruptcy costs

which are associated with increasing levels of debt.

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Since the evolution of the trade-off theory, debate has raged with researchers adapting the

assumptions to more realistic expectations and analysis (Kyereboah-Coleman,2007). One amongst

some identified short comings, is that in reality high profitable companies tend to have less debt

than less profitable companies as the former utilize the profits for financing.

Capital structure of banks is determined by various internal and external factors. The macro

variables of the economy of a country like interest rate, tax policy of a government, inflation rate,

capital market condition, are the major external factors that affect the capital structure of a firm. The

characteristics of an individual firm, which are termed here as micro factors (internal), also affect

the capital structure of enterprises.

Bankruptcy costs are the costs incurred when the perceived probability that the firm will default on

financing is greater than zero. The potential costs of bankruptcy may be both direct and indirect.

Examples of direct bankruptcy costs are the legal and administrative costs in the bankruptcy

process. Haugen and Senbet (1978) argue that bankruptcy costs must be trivial or nonexistent if one

assumes that capital market prices are competitively determined by rational investors. Examples of

indirect bankruptcy costs are the loss in profits incurred by the firms as a result of the unwillingness

of stakeholders to do business with them. Customer dependency on a firm’s goods and services and

the high probability of bankruptcy affect the solvency of firms (Titman,1984). If a business is

perceived to be close to bankruptcy, customers may be less willing to buy its goods and services

because of the risk that the firm may not be able to meet its warranty obligations. Also, employees

might be less inclined to work for the business or suppliers less likely to extend trade credit.

These behaviors by the stakeholders effectively reduce the value of the firm. Therefore, firms that

have high distress cost would have incentives to decrease outside financing so as to lower these

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costs. Warner (1977) maintains that such bankruptcy costs increase with debt, thus reducing the

value of the firm. According the Modigliani and Miller (1963), it is optimal for a firm to be

financed by debt in order to benefit from the tax deductibility of debt. The value of the firm can be

increased by the use of debt since interest payments can be deduced from taxable corporate income.

But increase in debt results in an increased probability of bankruptcy. Hence, the optimal capital

structure represents a level of leverage that balances bankruptcy costs and benefits of debt finance.

The greater the probability of bankruptcy a firm face as the result of increases in the cost of debt,

the less debt they use in the issuance of new capital (Pettit and Singer, 1985).

2.2.1 Attributes of Appropriate Capital Structure

The financial manager of any business firm is expected to determine the most efficient and suitable

mix of capital structure for optimization, this could be achieved by focusing on the interest of the

shareholder and the financial requirements of the company. As stated by Pandey (2005); an

appropriate capital structure should have the following features:

Return: the capital structure of the company should be most advantageous. Subject to other

considerations, it should generate maximum returns to the shareholders without additional coat.

Risk: the use of excessive debt threatens the solvency or liquidity of the company. To the point debt

does not add significant risk it should be used as source of capital; or its use should be avoided.

Flexibility: the capital structure should be flexible. It should be possible for a company to adapter

its capital structure with a minimum cost and delay if warranted by a changed situation. It should

also be possible for the company to provide funds whenever needed to finance its profitable

activities (projects).

Capacity: the capital structure should be determined within the debt capacity of the company, and

the capacity should not be exceeded. The debt capacity of a company depends on its ability to

generate future cash flows.

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Control: the capital structure should involve minimum risk of loss to control of the company. The

owners of closely held companies are particularly concerned about dilution of control.

2.3 Review of Empirical Studies

2.3.1 Firm size and Leverage

Trade-off theory predicts that a positive relationship between firm size and leverage can be found.

This is because big companies tend to be are more diversified and have lower default risk. The

pecking order theory, on the other hand, is generally interpreted as predicting a negative

relationship, since large firms face lower adverse selection and can more easily issue equity

compared to small firms. An overwhelming majority of empirical studies finds a positive relation

between leverage and size. Following Titman and Wessels (1988) and Rajan and Zingales (1995),

among others, we define size as the natural logarithm of total sales, adjusted for inflation.

Aremu, Ekop & Mustapha, (2013). Their study considered Capital structure as the cornerstone of

bank’s financial strength since it supports bank operations by providing a buffer to absorb

unanticipated losses from its activities and, in the event of problems, enabling the bank to continue

to operate in a sound and viable manner while the problems are addressed or resolved. This study

examine the relationship between the level of leverage ratios with Size, Dividend Payout,

Profitability, Tangibility, Liquidity, Growth and Tax Charge; with reference to the capital structure

models and theories, and to identify leverage ratios which indicates the most pertinent factor

motivating the capital structure choice in Nigerian Banking Industry between 2006 and 2010.The

research work makes use of the econometric procedure in estimating the relationship between banks

capital structure and its key determinants. The pooled ordinary Least Square (Pooled OLS)

technique was employed in obtaining the numerical estimates of the coefficients in different

17
equations. The findings of the study revealed that the main determinant factor which contribute to

the bank leverage level of the Banking industry in Nigeria between the years 2006 to 2010, includes

bank size, bank size is significant in determining capital structure of a bank. The study

recommended that future studies should increase the length of the research period of the study to

ensure that there is no biasness in drawing up samples for conclusions. Perhaps by covering a

longer time period, it will be more meaningful in explaining dependent variable. major players such

as bank managers, financial analysts and policy maker will have better understanding about the

factors which may influence the capital structure of the Nigerian banking sector and enhance

competitiveness in the banking sector. As well articulated as this study is the findings cannot be

relied upon, basically as the researcher used only five(5) out of the seventeen (17) money deposit

banks in Nigeria, the sample size may not be enough to generalize, pooled ordinary least square

which is not robust enough to bring out the statistical inference required.

Bassey, Arean & Okpukpara (2014).Thei r study examines the determinants of capital structure of

agro-listed firms in Nigeria, using data generated from the financial statements of twenty eight (28)

agro-allied firms, which have been listed in the Nigeria Stock Exchange (NSE) from 2005 to 2010.

The major tool for data analysis was Ordinary Least Squares (OLS), which was used to analyze the

identified firm-specific variables that affect short and long term debt ratios. All measured capital

structure were scaled by the book value of total assets. In terms of short term debt ratio, large firms

were perceived to have enough tangible assets at their disposal to pledge as collateral and access

debt capital. Highly tangible firms also use more short-term debts, as high tangible asset reduced

the magnitude of debt loss incurred by debt providers if the firms default.

Growing listed firms used more short term debts, presumably due to their huge capital requirement

for financing new short term investment opportunities and the need to meet current liabilities and

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other overhead expenses. Growing firms are presumed to lack both tangible assets and cheap long

term credit sources of information and as such depends mostly on short term debts. The result

further shows agro-listed firms with high taxes use more short term debts in their finances. Highly

profitable firms do not depend on short-term debts, as they are perceived to be liquid enough to

finance their short term investment through retained earnings at the expense of taking short term

debts.

In terms of long term debt ratio, highly profitable firms use less long term debts, implying that they

have enough internally generated funds for their financing needs at the expense of borrowing. Large

sized firms depend on long term debt for their finances because of high tangible assets at their

disposal as collaterals. Firm age was positively related to long term debt ratio. The estimated

growth coefficient was positively and significant, implying that growing firms use more long term

debts. Finally, asset structure was found to be positively related to long-term debt ratio. Firms with

high tangible assets are perceived to use more long term debts. It is recommended among others

that appropriate protectionist policy be put in place for agro-based listed firms seeking short-term

financing. Though the firm was published in 2014 which might be considered recent, it covers 2005

to 2010 making it relatively out of date, the study attempted to bring to focus firm specific feature

but fail to capture it in the analytical tools use, no theory was use to under pin this studies.

Olayinka (2011). The study examines the determinants of capital of 66 firms listed on the Nigerian

stock Exchange during the period 1999-2007. Based on data availability, six potential determinants

of capital structure were analyzed in the paper namely size, profitability, growth, tangibility,

business environment and liquidity. The results show that growth opportunities are negatively

related to leverage which is consistent with the prediction of the trade off theory. In the same way,

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leverage is negatively related with tangibility though significant only in pooled OLS estimation.

This finding

is in tandem with the predictions of pecking order theory, which suggests a negative association

between short-term debt and tangibility. The results suggest that leverage is negatively correlated

with profitability which is quite consistent with the pecking order hypothesis. In the same way,

leverage and size are positively related. This finding supports the view of size as an inverse proxy

for the probability of bankruptcy. Liquidity is positively correlated with leverage which is

consistent with trade-off theory. In general, three of the variables are not significant determinants of

capital structure.

Moreover, the others, namely profitability, size and growth opportunities are only significant at

10%. The main implication from these observations is that explanatory power of the capital

structure models that are derived from the western setting is limited in the case of Nigeria. This

result shows that even though there seems to be some common features in the capital structures of

firms in Nigeria and those in the advanced economies, further research is necessary to ascertain

determinants of capital structure of Nigeria based on the institutional settings. this study is the

findings cannot be relied upon, basically as the researcher used pooled ordinary least square which

is not robust enough of the fix and random effect of the sample size.

Igbinosa & Chijinka (2014) The study is focused on the analysis of the determinants of capital

structure of Nigeria companies for 2013. The cross-sectional least squares regression is applied to

determine the impact of two independent variables on debt ratio. The independent variables are

represented by company size and profitability. It is found that profitability is not a significant

determinant and has a negative impact on leverage while the impact of company size was not

confirmed in the model. The analysis of the determinants of corporate capital structure has valuable

20
implications for finance managers who can make better capital structure decisions to maximise the

wealth of the shareholders The current study answered the main research question about the

determinants of capital structure. It was explored why firms use different capital structure and the

conclusions about the significance of the impact of different variables are made.ROA was

insignificant in explaining the corporate capital structure decisions. However, the impact of the

company size on the capital structure was not confirmed in the regression models. The conclusions

led to a range of recommendations to company managers as well as generated the scope for further

possible studies of the matter.

The findings of the current study led to some recommendations to company managers and policy

makers with respect to capital structure decisions. For the selected sample it is evident that the

capital structure of the firms is not associated with the variables that were explored herein. At the

same time the regression showed that the ROA could be negatively associated with the debt ratio.

These findings can be applied by financial managers of the Nigerian enterprises when capital

structure decisions are made. The study applied the statistical methods to answer its research

question and achieve its aims and objectives. The achievement of the aims and objectives of the

investigation proves the relevance of the selected methods and justifies the approaches to the study

that have been chosen herein. It is therefore concluded that the research contributes to existing

knowledge on the decisions that are related to company capital structure. While previous empirical

studies and theories provided ambiguous results with regard to the determinants of capital structure,

the current research was able to identify no strongest determinants of the debt ratio for a specific

sample of companies for a particular period of time. As the statistical significance of different

variables is estimated, the objectives of the study are achieved. Consequently, the aim of the study

is successfully achieved. This study would have been wonderful if both macro and micro elements

are considered in variable selection.

21
Ogbulu & Emeni (2012) used cross-sectional research design in order to examine the cross-

sectional determinant of capital structure of 110 listed companies in Nigeria for the year 2008.

Using OLS techniques, the study found that size has significant positive impact on capital structure

of listed companies in Nigeria. The issue of the determinants of corporate capital structure of a firm

remains to date one of the most debated topics in corporate finance theory. Equally elusive has been

the answer as to how corporate finance managers determine their capital structure. This study

makes an attempt to add to the growing body of literature on the issue of corporate capital structure

by empirically examining the relationship with in the context of the Nigerian economy. While some

of the findings are in line with research conducted elsewhere, others (for example, growth) seem to

conflict with existing literature on the issue.

The study selected a rather small sample of 110 firms quoted on the Nigerian Stock Exchange over

the period 2000-2005, due to the unavailability of data necessary for the purpose of the research.

The findings are however encouraging enough to set forth future research agenda on a larger

sample of firms with a disaggregated set of dependent variables to further explore the issue of

corporate capital structure. Such research, the authors believe, would throw more light on the

controversy and hence form a more comprehensive view of the determinants of corporate capital

structure. Thus the importance and significance of corporate capital structure decisions in the

context of management of businesses can hardly be mitigated. The results of this study have

delivered some insights on the capital structure of Nigerian companies.

The issue of capital structure is an important strategic financing decision that firms have to make. It

is therefore recommended that: size and age of a firm are significant determinants of its capital

structure ,it is therefore recommended that, directors of companies in Nigeria should pay more

22
attention on two key capital structure indicators (size and age) so as to be in a good position to

manage their capital structure for better performance. Though this study was published in 2012 it

covers from 2005 to 2010 this period gap make this study less reliable as the banking sector had

undergone several reforms to invalidate findings of this study.

2..3.2 Firm Growth and Leverage

The agency cost theory and pecking order theory explain the contradictory relation between the

growth rate and capital structure. Agency cost theory suggests that equity controlled firms have a

tendency to invest sub-optimally to expropriate wealth from the enterprises’ bondholders. The

agency cost is likely to be higher for enterprises in growing industries which have more flexibility

in their choice of future investment. Hence, growth rate is negatively related with long-term debt

level (Jensen and Meckling, 1976). This theoretical result is backed up by the empirical studies

carried out by kim and Sorensen (1986), and Titman and Wessels, (1988) but Kester, (1986) study

rejected this relation. Pecking order theory, contrary to the agency cost theory, shows the positive

relation between the growth rate and debt level of enterprises. This is based on the reasoning that a

higher growth rate implies a higher demand for funds, and, ceteris paribus, a greater reliance on

external financing through the preferred source of debt (Sinha 1992). For, pecking order theory

contends that management prefers internal to external financing and debt to equity if it issues

securities (Myers 1984). Thus, the pecking order suggests the higher proportion of debt in capital

structure of the growing enterprises than that of the stagnant ones. Chung (1993), Chaplinsky and

Niehaus (1990) showed the evidence contrary to the pecking order sand trade-off hypothesis

pleads for the low level of debt capital of risky theory.

23
Barine (2012) studied Financial arrangements determine how and the amount of financing that can

be obtained from fund providers. An optimal allocation between equity and debt is determined by

the trade-off between the net tax advantage of additional corporate leverage and the costs associated

with the increased likelihood of financial distress and reduced marketability of a firm’s corporate

debt, and agency costs. To ascertain the determinants of this capital mix, research results from the

regression analysis of data obtained from seventeen financially successful quoted firms in Nigeria

show that this mix is positively determined by cost of equity, existence of debt tax shield, covenant

restrictions indebt agreements, firm dividend policy, competitor’s capital mix and profitability; and

negatively by cost of debt, parent company influence and fear of financial distress necessitating

new and financially unsuccessful firms to reduce debt/equity ratios when there exists a likelihood of

increased financial distress and high cost of debt and increase it when cost of equity, profitability

and benefits from tax shield is high, ensuring optimal trade-Off between costs and net tax

advantage of additional leverage and costs and benefits of equity in firm capital structure .

The study further recommend, reduce debt in the capital structure of their firms when there exists a

likelihood of increased financial distress and high cost of debt, increase debt in the capital structure

of their firms when cost of equity, profitability and benefits from tax shield is high, ensure optimal

trade-off between costs and net tax advantage of additional leverage and costs and benefits of

equity in firm capital structure, ignore corporate income tax itself in determining their firm capital

structure but take cognizance of tax benefits of debt in their firm capital structure and identify his

firm’s operating risk using ratio analysis, a successful firm with similar characteristics, and adopt its

capital structure, as competitors’ capital structures positively affect firm capital structure. There is

need to include more variable and increase the g sample size of this study.

24
Chandrasekharan C. V( 2012) The study examines the determinants of capital structure in Nigerian

listed firms.It sets to fill the gap in the literature by investigating the potential determinants of

capital structure among listed Nigerian firms for a period of ten years from 2007 to 2011both years

inclusive. It examines the impact of firms’ tangibility, size, growth, profitability and age on the

leverage of the sampled firms. Secondary data from the annual reports of the sample firms have

been analysed using panel multiple regression .The result reveals that size, age, growth, profitability

and tangibility are strong determinants of leverage in the Nigerian firms. Therefore, it is

recommended that in carrying out their debt financing decision, the financial managers of Nigerian

listed firms should deploy and properly measure size, age, growth, profitability and tangibility of

the firms in order to have an optimum financing mix for their firms .The study reveals that for the

Nigerian listed firms, three out of five of the explanatory variables are significant with the

dependent variable whereas the remaining two, which include profitability and tangibility are not .It

was also observed that the coefficient of two explanatory variables, that is size and age, are

negative, and are both significant at 1%. Whereas, growth, profitability and tangibility shows a

positive coefficient even though it is only growth that is significant at 5% and the other two

explanatory variables are not significant.

Finally, the entire result shows that all the explanatory variables put together explain the dependent

up to 54% as indicated by the adjusted R2. Similarly, the result of the F-statistic shows that the

model is well fitted as it is significant at 1%.The study has provided insight into predictor variables

that have important impact in explaining the dependent variable of the listed firms in Nigerian listed

firms. From the perspective of regulatory authorities, especially Security and Exchange

Commission, Central Bank of Nigeria, Federal Inland Revenue Services, among others, these

findings should assist in establishing a code of corporate governance that will eventually reduce the

problems associated with debt equity financing. From the view point of the determinants of capital

25
structure, the findings will also assist in establishing financial policy guidelines that will mitigate

financial risk in their various firms. Similarly ,given the outcome of this study, the model used in

this study could be used as a basis for formulating debt equity policy in Nigeria that will maximise

the wealth of shareholders and increase the value of firms. The findings should be of policy

relevance to SEC in issuing out guidelines for sourcing fund at capital market which would boost

the economic activities in the market in particular and economy in general. Apparently this study is

outdated.

Anthony & Odunayo (2015) This study was carried out to examine the major determinant of

capital structure of quoted composite insurance companies in Nigeria. A descriptive and

explanatory research designed was adopted for this study and the secondary data extracted from the

annual report of the purposeful composite insurance was analyzed using panel data regression

technique. The results revealed that tangibility, growth and Liquidity had a negative impact on the

Leverage while Risk, Return on Asset and Size have a positive influenced on Leverage, it was

discovered from this study that all the variables identified are statistically significant except Return

on Asset and growth; the model was reliable and appropriate for determining capital structure of

composite insurance companies; It can be concluded that fixed effect panel regression model was

better than the random effect model in determining the capital structure of composite insurance in

Nigeria.In conclusion and policy recommendation. Thus, four out of the five variables used to

measure effect on debt ratio were found to be statistically significant when measuring the impact of

company’s debt ratio on insurance industry in Nigeria. Based on the research results, the insurance

companies should have a high consideration for asset increase because the size of company is an

important factor that has a positive effect on leverage. Risk, Tangibility, Return on Asset, Liquidity,

Growth and Size are drivers of optimal capital structure of various insurance companies in Nigeria.

26
Insurance companies should pursue most important capital structure theories like pecking order

theory and trade off theory. The study established that fixed effec model is more reliable,

appropriate and acceptable for the financial leverage or capital structure of insurance companies in

Nigeria. Thus, the study recommended that management of insurance industry and the regulatory

authority in Nigeria should set up a more favorable financial structure to enhance their

sustainability. This study recommendations were not clearly stated, no theory was used to under pin

this study

Iwarere & Akinbye (2010) examined the factors considered in choosing appropriate amount of

equity and capital in Nigeria banking industry using data gathers through a survey conducted. The

survey was administered through randomly selected financial manages of the banks in western

Nigeria. Chi-square test was employed to test the different in opinion of respondent on each

possible determinant of capital structure, size influence capital structure of banks significantly.

Anarfo (2015) .This study seeks to examine the determinants of capital structure of banks in Sub-

Sahara Africa. This study has employed the use of panel data techniques to analyze the

determinants of capital structure of banks in sub-Sahara Africa The dependent variables used in the

study were short-term debt ratio , long-term debt ratio and the total debt ratio . The independent

variables were: return on asset , asset tangibility , Size of the bank , growth rate of total assets ,

corporate marginal tax rate , growth rate , interest on loans , inflation rate .

The results from Levin-Lin-Chu and Im-pesaran-shin unit root test show that all the variables were

stationary in levels. The results also indicate that, the return on asset, size, asset tangibility, growth

rate of banks and inflation rates are statistically significant in determining the capital structure of

banks in Sub-Sahara Africa. However, corporate marginal tax rate, GDP growth rate and the

27
interest rate on loans are not statistically significant in determining banks capital structure in Sub-

Sahara Africa. since return on asset is statistically significant and negatively impact short-term debt

ratio, the long-term debt and the total debt ratio, the management of banks in Africa should be

concerned with putting measures in place to enhance their return on assets .

If banks should put measures in place to increase and enhance their return on asset , it will reduce

their debt ratios. A reduction in banks debt ratios will enable them avoid some of the negative

tendencies that is associated with increasing financial leverage such as bankruptcy cost and

financial distress. Banks should also have more tangible assets which they can use generate more

profit in order to reduce their debt ratios since tangible asset is significant in determining their total

debt ratio. Banks should also growth their assets since asset growth reduces their long-term debt

ratio significantly.

The government and monetary authorizes should put policies in place to curb inflation in order to

avoid unanticipated inflation, since unanticipated inflation reduces banks debt ratios because the

cost of borrowing will be very high. However the finding of this study may not be reliable data used

for this study are not current . The data on banks’ capital structure and performance variables was

gathered from 2000 to 2006, according to the researcher, more current years were not considered,

this may affect the extent of applicability of findings as the phenomenon under study may have

changed over the last few years, most of the banks analyzed in this study do not have data up to

date and this may be due to the fact that, most of the banks might have undergone mergers and

acquisition due the minimum legal capital requirements that might have forced most of the banks

to merge.

2.3.3 Firm Age and Leverage

28
As a firm continues longer in business, it establishes itself reputation and goodwill and therefore

increases its capacity to take on more debt; hence age is positively related to debt. Before granting a

loan, banks tend to evaluate the creditworthiness of entrepreneurs, this may include assessing it

years of existence , when it comes to highly indebted companies, they are essentially gambling with

their creditors money. If the investment is profitable, shareholders will collect a significant share of

the earnings, but if the project fails, then the creditors have to bear the consequences (Myers, 1977).

To overcome problems associated with the evaluation of creditworthiness, Diamond (1984)

suggests the use of firm reputation. He takes reputation to mean the good name a firm has built up

over the years; the name is recognized by the market, which has observed the firm’s ability to meet

its obligations in a timely manner.

Chechet, Garba & Odudu (2013) The study assessed the determinants of capital structure in

Nigerian Chemical and Paints companies listed in Nigeria, for a period of five years from 2005 to

2009. The study employed secondary data from the annual reports and the Nigerian Stock

Exchange (NSE) fact books covering the study period Ordinary least square (OLS) was employed

to determine whether relationship exists between leverage ratio and various independent variables

in the model. The study reveals that for the Nigerian Chemical and Paints sector, tangibility and

profitability have significant impact on leverage at 1% level, while size, growth and age have

insignificant impact on the dependent variable. It also shows that the coefficient of the two

significant explanatory variables, which are tangibility and profitability are negative.

The effect of tangibility on capital structure suggests a negative relationship between tangibility and

leverage contrary to both trade off theory and pecking order theory. Also the relationship between

growth rate and level of leverage contradict both the pecking order and the trade off theory. Three

out of five of the explanatory variables have significant impact on the dependent variable whereas

29
the remaining two, which include profitability and tangibility, are not significant. The study

therefore, recommends that in carrying out their debt financing decision, Chemical and Paints

should deploy and properly measure variables like size, age, growth, profitability and tangibility of

the firms. This study use ordinary least square regression analyst which does not have the

robustness for proper analysis.

Bassey, Arene & Akpaeti (2013) The study examined the determinants of capital structure decision

and compared the capital structure of quoted and unquoted agro-based firms in Nigeria. Data

collected through a multi-stage random sampling from the financial statements of 28 quoted and 60

unquoted agro-based firms for the period 2005-2010 were analyzed using descriptive statistics, Z-

test and Ordinary Least Square regression. The result revealed significant differences in capital

structure (long term debt and total debt use) between quoted and unquoted agro-based firms. Short-

term debts constituted a higher proportion of total debts of both sampled groups. The regression

result showed that firm size ,asset structure and growth coefficients had significant positive

relationships with both long and short term debt finance for both listed and unlisted agro-based

firms respectively. Result further showed that age of firms, educational status of CEO, export status

of firms, and gender of firm owners were positive and significantly related to long term debt for

both listed and unlisted firms. Also, highly profitable firms depended on internally generated

revenue ,thereby lending credence to the pecking order theory .

The study showed that pecking order theory dominated the financing behavior of agro-based firms

in Nigeria while the agency cost argument was only relevant for listed agro-based firms .Hence,

policies that would enhance the acquisition of tangible assets, encourage exportation, ensure

appropriate record keeping and encourage the use of more long term finance in place of short-term

finance should be pursued. Evidence suggested significant differences in both long term debt and

30
total debt ratios of quoted and unquoted agro-based firms. Short-term debts constituted a higher

proportion of total debts of both sampled groups .Large sized and highly tangible quoted and

unquoted firms depended on long term debts, thereby supporting the agency cost argument and

showing the importance of fixed assets in securing long term debts.

Further more, while male owned firms, exporting firms and older firms relied on long term debts,

educated entrepreneurs and growing listed firms depended on both long and short term financing

Also,agro-based firms with high degree of business risk and high taxes relied on short term debt

financing .Based on the findings of the study, the following recommendations emerged exporting

firms were found to access and used more long term finances than non exporting firms; hence,

policies that would encourage exportation should be pursued. Giving incentives such as reduction

of export duties to agro exporting can help out.

This would enable them access huge cash inflows and generate foreign exchange that can be

plough back into their businesses. Large sized and highly tangible firms were found to have easy

access to long term finance than smaller sized and less tangible firms, hence, growing firms should

be encourage to accumulate more tangible asset Tax incentives such as tax exemption and rebates

can be given to start-up firms. Agro firms should be encouraged to keep adequate financial records.

This would enable them ascertain their present and future capital requirement.

It would also enable them measure their firm’s profitability level. From the findings, agro firms

were found to use more short term finances than long term finances. Hence, if agro-firms should

acquire debt finance, effort should be directed towards encouraging them to use more long term

debts. This can be achieved through proper enlightenment campaign in the areas of cheap long term

credit sources information at concessionary interest rates and less stringent conditions can be of

31
help. This study included variable that are not used and are not relevant to the determination of

capital structure ie gender, quoted and unquoted companies and chief executive level of education

and it fail to prove them relevant in the determinant of capital structure.

Saleem,Rafique, Mehmood ,Tariq& Akram,( 2013) . The study examines the determinants of capital

structure in Oil and Gas firms of Pakistan on a data for the period of 2006 to 2011. Many regression

techniques are used to analyze the relationship between dependent variable (Leverage) and

independent variables (Firm Size, Tangibility of Assets, Profitability, and Sales Growth). It is done

all independent variables have significant impact on the balance of leverage. It is concludes that

firm size, tangibility of assets and profitability having positive relationship with leverage. On the

other hand sales growth has negative relationship with leverage.

It is suggest that internally generated funds may not be sufficient for growing firms and debt

financing may be the only option for further growth. Tangibility is significantly related to debt. In

Pakistan, accounting profits do not reflect a true depiction of firm performance, creditors wish the

security of specific claim on fixed assets high ratio of intangible assets causes hurdle to borrow long

term debt because intangible assets cannot be collateralized this reason shows negative relation

between growth opportunities and leverage. Size has a positive coefficient it means that firms in the

sample do not consider their sizes as an active variable in deciding the leverage level. Size gives a

proportional advantage of lower asymmetric information.

Profitability we attained a positive relation that supports Pecking order theory. The results suggest

that more profitable firms do not often finance their investments by debt source in textile sector of

Pakistan. More profitable firms tend to issue more debt and repurchase equity. Less profitable firms

tend to do the overturn. Firm size also matters. Larger firms tend to be more active in the debt

32
markets while smaller firms tend to be moderately more active in the equity markets. This study

however apart from being foreign did not show clearly how it variables were measured.

Sabir & Malik, (2012) . The study intends to analyze the effect of profitability, tangibility, size and

liquidity on capital structure decisions of the listed companies in oil and gas sector of Pakistan. The

study attempts to provide information that may help in taking capital structure decisions in listed

companies of oil and gas sector of Pakistan, which will ultimately support in maximization of the

value of firms on the one side and the minimization of cost of capital on the other side. The results

indicated that profitability is the only variable that showed negative relationship against the

dependent variable leverage, whereas the other three variables, liquidity, size and tangibility have

positive relationship with leverage.

The study concludes that capital structure decisions in listed oil and gas sector companies are

mostly determined by the factors studies. The study substantiates the findings of most of the

researches conducted on capital structure, concluding that there is an optimal capital structure that is

affected by a variety of internal and externall factors. Apparently this study did not aligned it

finding to any of the known theory of capital structure in term of either rejecting or validating any

theory.

Sayigan& karabacak( 2014).The study carry out empirical testing, using dynamic panel data

methodology, to analyze the impact of firm specific characteristics on the corporate capital structure

decisions of Turkish firms. The sample covers123 Turkish manufacturing firms listed on the

Istanbul Stock Exchange (ISE) and the analysisis based on the year-end observations of ten

consecutive years running from 1993-2002. In this study, the panel data methodology is used and

six variables - size, profitability and growth opportunities in plant, property and equipment, growth

33
opportunities in total assets, non-debt tax shields and tangibility - are analyzed as the firm specific

determinants of the corporate capital structure.

This work contributes to the existing body of literature in the way that all of the independent

variables of the study are significant determinants for the capital structure decisions of Turkish

firms. The findings of this studies showed that variables of size and growth opportunity in total

assets reveal a positive association with the leverage ratio, however, profitability, growth

opportunities in plant, property and equipment, on-debt tax shields and tangibility reveal inverse

relation with debt level. This studies covered a large sample, large enough to enhance the validity

of it findings , failed in it choice of veriable ie it did consider firm growth as a whole rather split

them into growth opportunity in plant and property, thus making the finding invalid.

2.3,4 Firm Profitability and leverage

The profitability of firms implies higher debt capacity and less risky to the debt holders. So, as per

this theory, capital structure and profitability are positively associated. But pecking order theory

suggests that this relation is negative. Since, as stated earlier, firm prefers internal order financing

and follows the sticky dividend policy. If the internal funds are not enough to finance financial

requirements of the firms, it prefers debt financing to equity financing (Myers 1994). Thus, the

higher profitability of the enterprise implies the internal financing of investment and less reliance

on debt financing, Aremu, Ekpo and Mustapha (2013). Most of the empirical studies support the

pecking order theory. The studies Titman and Wessel (1988),Kester (1986), Friend and Lang (1988),

Gonedes (1988) show that negative relationship exist between the level of debt in capital structure

and profitability Indian and Nepalese studies (Baral, 1996). Only a few studies show the evidence

in favor of static trade – off hypothesis contention.

34
Uremu, (2012).This study presents empirical evidence of the effect of bank capital structure and

liquidity on profitability using Nigerian data for the period 1980-2006 studied. The data were

analyzed using descriptive statistics and the auto-regressive distributed lag (ADL) model.

Specifically, the study applied data on an OLS methodology that incorporated unit root tests for

stationary and co-integration. The study find a positive influence of cash reserve ratio, liquidity

ratio and corporate income tax; and a negative influence of bank credits to the domestic economy,

savings deposit rate, gross national savings (proxy for deposits with the central bank), balances with

the central bank, inflation rate and foreign private investments, on banking system profits. We

equally observe that liquidity ratio leads banks’ profits in Nigeria, closely followed by balances

with the central bank and then, gross national savings and foreign private investments, followed suit

in that order. We therefore recommend a drastic reduction in balances with central bank, liquidity

ratio and cash reserve ratio profiles by the monetary authorities to enable banks create adequate

credits and release more money into circulation for effective financial intermediation to occur;

ensure effective and efficient management of bank liquidity by banks to moderate levels so as to

optimize profitability, and curb perennial unethical banking practices such as directly engaging in

trading, importation and exportation of goods, and other speculative deals, instead of lending to the

domestic economy on the other side. The results indicated that profitability is the only variable that

showed negative relationship against the dependent variable leverage, whereas the other three

variables, liquidity, size and tangibility have positive relationship with leverage.

The study concludes that capital structure decisions in listed oil and gas sector companies are

mostly determined by the factors studies. The study substantiates the findings of most of the

researches conducted on capital structure, concluding that there is an optimal capital structure that is

affected by a variety of internal and external factors.This study did that not carry out any robustness

to show how reliable is the data use for this study as such it finding cannot stand.

35
Ali, Zia & Razi (2012)This study aims to analyze the impact of capital structure on the profitability

of petroleum sector of Pakistan, while controlling the size of the company. A total of 12 companies

were selected randomly for the study and take ten years data from 2001 to 2010. Regression

analysis was conducted. The results show that there is a significant and positive impact of capital

structure on the profitability of the petroleum sector; this study has potential for replication in other

industries like cement, textile and pharmaceutical. In over all analysis capital structure has the

significant analysis but the individual analysis of every company has not significant because every

company has their own capital structure and the overall Profitability depend on the capital structure,

the aim of a research should be either to formulate a theory or to validate one which this study has

fail to address

Clementia & Isu,( 2010).This study examined the effects of capital structure of banks on the

performance of commercial banks in Nigeria, (1970 -2010). The choice of the period, 1970 –2010

is meant to capture the important changes that took place in the banking sector immediately after

the cessation of civil hostilities brought about by the civil war in Nigeria, 1967 to January 15th,

1970. Note that during this period, Nigeria had revised of the minimum capital requirements, for

banks had established Community Banks, the Peoples Banks and introduced the Structural

Adjustment Program (SAP). Capital position of Commercial Banks in Nigeria deteriorated in the

late 1980’s, many financial institutions suffered from insolvency while many others were

technically insolvent. The study captures the performance indicators of banks and employed time

series of bank data obtained from the Statistical Bulletin of Central Bank of Nigeria (CBN) and Fact

books.

36
The formulated models were estimated using ordinary least square regression methods. The study

identified long run positive relationship between capitalization and profitability. This is supported

by the results of the research conducted by Ubom (2004), Kwan & Eisenbeis (2005) and Adegbaju

& Olokoyo (2008).The result of Granger Causality indicates that the significant relationship

between capitalization and profitability is by directional, implying that increase in capital leads to

increase in profitability and vice versa of Commercial banks in Nigeria. The implication of this

study, among others, is that improved capital position of Commercial banks in Nigeria will enhance

their performance, restore the credibility and confidence of customers in banking operations. The

researcher recommend that those strategies that will lead to continuous improvement in the capital

position of banks should be embraced. This study apart from been outdate has no significant impact

as it only seek to show the impact of profitability on commercial banks after the civil war in the

70s.

Ahi (2013) The study investigates capital structure determinants of 5 important non-financial firms

listed in FTSE100. The firms are chosen from oil and gas and mining industry. The period chosen

for the study is 22 years from 1990 to 2012. Firms are chosen according to capitalization in market.

Theories in capital structure such as the trade-off theory, pecking order theory and agency theory

are described in order to find the best possible formulation to predict the choice of capital structure

in firms. This study has chosen panel data to perform regression analysis with fixed effects

estimation model. The variables chosen for this study are total debt ratio, profitability, growth, non

debt tax shield, liquidity, tangibility and size. The results have shown that the findings in this study

are according to previous studies. The empirical results show that liquidity, profitability and size are

the variables which can cause changes in total debt ratio of firms.

37
It is concluded that the further directions for future studies could be choosing more firms take into

consideration the other theories of capital structure. This study has used total debt ratio, while long

term debt ratio and short term debt ratio could also be useful to analyze firms and obtain more

detailed results, no theory was used to under pin this study as such the contribution and focus of

this studies is not clear.

Affandi,Mahmood,& Shukur,( 2012). This study examines the capital structure determinants of 54

property companies listed in the Bursa Malaysia’s property sector. Employing Fixed Effect

Estimation model, the empirical results reveal that the debt-equity structure of the companies is

influenced by the various firm-specific attributes and macro-economic factor. In particular, the

evidence shows that property asset intensity and firm size of these property companies are

significant determinants of corporate debt policy. On the other hand, profitability do not appear to

suggest any significant contribution on the capital structure decision of property companies.

The major contributions of this paper have been the identification of several key factors influencing

the corporate debt decisions of property companies. The research results have important

implications as property companies usually rely heavily on external funding to support their

investment activities. Specifically the study shows that the asset intensity of property companies has

a significant impact on their debt raising capacity. The empirical evidence also highlights the

significance of firm size in the debt determination. However, the study shows the profitability do

not contribute to any significant role in determining the debt-equity choice of property companies.

Shehu, (2012). The study investigates the determinants of capital structure in Nigerian listed

insurance firms using data obtained from annual report of the sampled firms for the period 2001-

2010. We used five explanatory variables to measure their effects on debt ratio. Multiple regression

38
is employed as tool of analysis. The result reveals that all the explanatory variables have

statistically and significantly influenced the explained variable. The results approve the prediction

of pecking order theory in the case of profitability and trade-off theory in case of tangibility

variables. The growth variable supports the agency theory hypothesis whereas size variable

confirms to the asymmetry of information theory. It is therefore recommended that the management

of listed insurance firms in Nigeria should always consider their position using these capital

structure determinants as important inputs before embarking on debt financing decision.This study

fail to accommodate the macro element of the insurance industries, as insurance company don’t

operate in isolation as the general economical effect of has an impact on this industries, fixed and

random effect of the insurance industry was not considered, there was no robustness test conducted.

Nbiei ,Noroozi, Madine,& Chadegani, (2012). this study found that, Capital structure is found to

have Impact on firm performance. Bank consolidation in Nigeria has increased bank equity capital

against debt. This study aims to determine the impact of post-consolidation capital structure on the

financial performance of Nigeria quoted banks. The study used profit before tax as a dependent

variable and two capital structure variables (equity and debt) as independent variables. The sample

for the study consists of ten(10) Nigerian banks quoted on the Nigerian stock exchange(NSE) and

period of eight (8) years from 2005 to 2012. The required data and information for the study were

gathered from published annual reports. Ordinary least square regression analysis of secondary data

shows that capital structure has a significant positive relationship with the financial performance of

Nigeria quoted banks. This suggests that the management of quoted banks in Nigeria consistently

use debt and equity capital in financing to improve earnings. This study is limited in terms of it

reliability because it use of ordinary least square regression, no theory is used to underpin this

studies.

39
2.3.5. Firm Tangibility and leverage

Due to the conflict of interest between debt providers and shareholders (Jensen and Mekling, 1976),

lenders face risk of adverse selection and moral hazard. Consequently, lenders may demand

security, and collateral value (proxied by the ratio of fixed total assets) may be a major determinant

of the level of debt finance available to companies (Scott 1977), Stiglitz and Weiss (1981),

Willianmson (1988) and Harris and Raviv (1990).

The degree to which firms’ assets are tangible and generic should result in the firm having a greater

liquidation value. Capital intensive companies will relatively employ more debt (Myers, 1977), as

pledging the assets as collateral (Myers, 1977; Harris and Raviv, 1991) or arranging so that a fix

charge is directly placed to particular tangible assets of the firm. Bank financing will depend upon

whether the lending can be secured by tangible assets (Storey, 1994; Berber & Udell 1998).

Shan& khan, (2007).The study looked at the determinants of capital structure of KSE listed none-

financial firms for the period 1994-2002. Pooled regression analysis was applied with the

assumption that there were no industryor time effects. However, using fixed effect dummy variable

regression, the coefficients for a number of industries were significant showing there were

significant industry effects hence we accepted the later model for our analysis. six explanatory

variables were used to measure their effect on leverage ratio. Three of the variables were

significantly related to leverage ratio whereas the remaining three variables were not statistically

significant in having relationship with the debt ratio. the results approve the prediction of trade-off

theory in case of tangibility variable whereas the earning volatility , and depreciation variables fail

to confirm to trade-off theory. The growth variable confirms the agency theory hypothesis whereas

profitability approves the predictions of pecking order theory. Size ( variable neither confirms to

the prediction of trade-off theory nor to asymmetry of information theory.

40
Khrawish & khaiwesh ,(2008). This study examined the capital structure of listed industrial

companies on Amman Stock Exchange (ASE) over the period (2001-2005). The findings of this

study contribute towards a better understanding of financing behaviour in Jordanian industrial

companies. Hypotheses, based on comparing the relationships between Leverage ratio , Long-term

debts/total debts and five explanatory variables that represent size,tangibility, profitability, long-

term debt and short-term debt. To test those relationships regression analysis for Leverage ratioand

debts/total debts model was used to explain determinants of the capital structure of Jordanian

industrial companies on the time period (2001 - 2005).There was a significant positive relationship

between leverage ratio and size , Tangibility , long-term debt and short-term debt and there was a

significant negative relationship between leverage ratio and profitability of the firm. In other words,

the results of this study showed that a significant positive relationship between and s debts/total

debts size , Tangibility and long-term debt) and there was a negative relationship between and

debts/total debts short-term debt of the firm. Also, the results showed that Total assets, Tangibility,

Long-term debt, had a positive correlation with . While, s debts/total debts short-term debt had a

negative correlation with debts/total debts

Bassey, Arene & Akpaeti (2013) The study examined the determinants of capital structure decision

and compared the capital structure of quoted and unquoted agro-based firms in Nigeria. Data

collected through a multi-stage random sampling from the financial statements of 28 quoted and 60

unquoted agro-based firms for the period 2005-2010 were analyzed using descriptive statistics, Z-

test and Ordinary Least Square (OLS) regression. The result revealed significant differences in

capital structure (long term debt and total debt use) between quoted and unquoted agro-based firms.

Short-term debts constituted a higher proportion of total debts of both sampled groups. The

regression result showed that firm size ,asset structure and growth coefficients had significant

41
positive relationships with both long and short term debt finance for both listed and unlisted agro-

based firms respectively. Result further showed that age of firms, educational status of CEO, export

status of firms, and gender of firm owners were positive and significantly related to long term debt

for both listed and unlisted firms. Also, highly profitable firms depended on internally generated

revenue ,thereby lending credence to the pecking order theory .

Therefore,the study showed that pecking order theory dominated the financing behavior of agro-

based firms in Nigeria while the agency cost argument was only relevant for listed agro-based firms

.Hence, policies that would enhance the acquisition of tangible assets, encourage exportation,

ensure appropriate record keeping and encourage the use of more long term finance in place of

short-term finance should be pursued.

The study examined the various determinants of capital structure and compared the capital structure

of quoted and unquoted agro-based firms in Nigeria. Evidence suggested significant differences in

both long term debt and total debt ratios of quoted and unquoted agro-based firms. Short-term debts

constituted a higher proportion of total debts of both sampled groups .Large sized and highly

tangible quoted and unquoted firms depended on long term debts, thereby supporting the agency

cost argument and showing the importance of fixed assets in securing long term debts. Further

more, while male owned firms, exporting firms and older firms relied on long term debts, educated

entrepreneurs and growing listed firms depended on both long and short term financing Also,agro-

based firms with high degree of business risk and high taxes relied on short term debt

financing .Based on the findings of the study, the following recommendations emerged exporting

firms were found to access and used more long term finances than non exporting firms; hence,

policies that would encourage exportation should be pursued.

42
Giving incentives such as reduction of export duties to agro exporting can help out. This would

enable them access huge cash inflows and generate foreign exchange that can be plough back into

their businesses. Large sized and highly tangible firms were found to have easy access to long term

finance than smaller sized and less tangible firms, hence, growing firms should be encourage to

accumulate more tangible asset Tax incentives such as tax exemption and rebates can be given to

start-up firms. Agro firms should be encouraged to keep adequate financial records. This would

enable them ascertain their present and future capital requirement. It would also enable them

measure their firm’s profitability level. From the findings, agro firms were found to use more short

term finances than long term finances. Hence, if agro-firms should acquire debt finance, effort

should be directed towards encouraging them to use more long term debts. This can be achieved

through proper enlightenment campaign in the areas of cheap long term credit sources information

at concessionary interest rates and less stringent conditions can be of help.

Saleem,Rafique, Mehmood ,Tariq& Akram,( 2013) . The study examines the determinants of capital

structure in Oil and Gas firms of Pakistan on a data for the period of 2006 to 2011. Many regression

techniques are used to analyze the relationship between dependent variable (Leverage) and

independent variables (Firm Size, Tangibility of Assets, Profitability, and Sales Growth). It is done

all independent variables have significant impact on the balance of leverage. It is concludes that

firm size, tangibility of assets and profitability having positive relationship with leverage. On the

other hand sales growth has negative relationship with leverage.

It is suggested that internally generated funds may not be sufficient for growing firms and debt

financing may be the only option for further growth. Tangibility is significantly related to debt. In

Pakistan, where court process is slow and accounting profits do not reflect a true depiction of firm

performance, creditors wish the security of specific claim on fixed assets high ratio of intangible

43
assets causes hurdle to borrow long term debt because intangible assets cannot be collateralized this

reason shows negative relation between growth opportunities and leverage. Size has a positive

coefficient it means that firms in the sample do not consider their sizes as an active variable in

deciding the leverage level. Size gives a proportional advantage of lower asymmetric information.

For profitability we attained a positive relation that supports Pecking order theory.

The results suggest that more profitable firms do not often finance their investments by debt source

in textile sector of Pakistan. More profitable firms lean to issue more debt and repurchase equity.

Less profitable firms tend to do the overturn. Firm size also matters. Larger firms tend to be more

active in the debt markets while smaller firms tend to be moderately more active in the equity

markets.

Clementia & Isu( 2010)This study examined the effects of capital structure of banks on the

performance of commercial banks in Nigeria, (1970 -2010). The choice of the period, 1970 –2010

is meant to capture the important changes that took place in the banking sector immediately after

the cessation of civil hostilities brought about by the civil war in Nigeria, 1967 to January 15th,

1970. Note that during this period, Nigeria had revised of the minimum capital requirements, for

banks had established Community Banks, the Peoples Banks and introduced the Structural

Adjustment Program (SAP). Capital position of Commercial Banks in Nigeria deteriorated in the

late 1980’s, many financial institutions suffered from insolvency while many others were

technically insolvent. The study captures the performance indicators of banks and employed time

series of bank data obtained from the Statistical Bulletin of Central Bank of Nigeria (CBN) and Fact

books.

44
The formulated models were estimated using ordinary least square regression methods. The study

identified long run positive relationship between capitalization and profitability. This is supported

by the results of the research conducted by Ubom (2004), Kwan & Eisenbeis (2005) and Adegbaju

& Olokoyo (2008).The result of Granger Causality indicates that the significant relationship

between capitalization and profitability is by directional, implying that increase in capital leads to

increase in profitability and vice versa of Commercial banks in Nigeria.

The implication of this study, among others, is that improved capital position of Commercial banks

in Nigeria will enhance their performance, restore the credibility and confidence of customers in

banking operations. We therefore recommend that those strategies that will lead to continuous

improvement in the capital position of banks should be embraced. This study apart from been

outdate has no significant impact as it only seek to show the impact of profitability on commercial

banks after the civil war in the 70s.

Uremu, (2012).This study presents empirical evidence of the effect of bank capital structure and

liquidity on profitability using Nigerian data for the period 1980-2006 studied. The data were

analyzed using descriptive statistics and the auto-regressive distributed lag (ADL) model.

Specifically, the study applied data on an OLS methodology that incorporated unit root tests for

stationary and co-integration. The study find a positive influence of cash reserve ratio, liquidity

ratio and corporate income tax; and a negative influence of bank credits to the domestic economy,

savings deposit rate, gross national savings (proxy for deposits with the central bank), balances with

the central bank, inflation rate and foreign private investments, on banking system profits. We

equally observe that liquidity ratio leads banks’ profits in Nigeria, closely followed by balances

with the central bank and then, gross national savings and foreign private investments, followed suit

in that order. We therefore recommend a drastic reduction in balances with central bank, liquidity

45
ratio and cash reserve ratio profiles by the monetary authorities to enable banks create adequate

credits and release more money into circulation for effective financial intermediation to occur;

ensure effective and efficient management of bank liquidity by banks to moderate levels so as to

optimize profitability, and curb perennial unethical banking practices such as directly engaging in

trading, importation and exportation of goods, and other speculative deals, instead of lending to the

domestic economy on the other side. The results indicated that profitability is the only variable that

showed negative relationship against the dependent variable leverage, whereas the other three

variables, liquidity, size and tangibility have positive relationship with leverage.

The study concludes that capital structure decisions in listed oil and gas sector companies are

mostly determined by the factors studies. The study substantiates the findings of most of the

researches conducted on capital structure, concluding that there is an optimal capital structure that is

affected by a variety of internal and external factors. This study did that not carry out any

robustness to show how reliable is the data use for this study as such it finding cannot stand.

2.3.6 Interest rate and Leverage

Interest rate is the cost of borrowing for the firm, when a bank has the capacity to pay interest on

the borrowed amount this may entice the bank to take advantage of lower interest to apply for more

debt taking advantage of the lower rate, so also when the interest rate is high bank may tend to

result to using more of equity financing and avoid new debt. The findings of Ooi (1990) concluded

that the relationship between interest rate and leverage is negatively related, while

Hung, Albert, &, Eddie, (2002).find out that there is a positive relationship between leverage and

interest rate.

46
Wahab & Ramli, (2014) .In this study explore how the debt equity choices of Listed Malaysian

Government linked Companies are influenced by the firm specific characteristics and

macroeconomic variables using a sample of 13 from 1997 to 2009 Two elements of leverage, book

value of total debt ratio and long term debt ratio were used to check for any significant changes in

corporate financing and found mixed results. interest rate are negatively significant w. The study

concluded that profitability is inconsequential in determining corporate financing; inconsistent with

the findings of previous Malaysian studies.

The study has outlined several recommendations for further research. The study is restricted to

listed GLCs in Malaysia. The study sample is relatively small because of several constraints. Thus,

we suggest that more research should be done. Both the leverage ratios are measured by using book

value and not the market value. So, it would bemore interesting if the leverage measurement can be

extended to market value. In addition, future research can be carried out with a comparative

analysis of GLCs across countries. As stated by the researcher, this research is restricted to

malaysian economy thus it not applicable to other economy.

Anarfo (2015) This study seeks to examine the determinants of capital structure of banksin Sub-

Sahara Africa.This study has employed the use of panel data techniques to analyze the determinants

of capital structure of banks in sub-Sahara Africa The dependent variables used in the study were

short-term debt ratio , long-term debt ratio and the total debt ratio. The independent variables were:

return on asset , asset tangibility , Size of the bank , growth rate of total assets , corporate marginal

tax rate , GDP growth rate , interest on loans , inflation rate. The results from Levin-Lin-Chu and

Im-pesaran-shin unit root test show that all the variables were stationary in levels. The results also

indicate that, the return on asset, size, asset tangibility, growth rate of banks and inflation rates are

statistically significant in determining the capital structure of banks in Sub-Sahara Africa. However,

47
corporate marginal tax rate, GDP growth rate and the interest rate on loans are not statistically

significant in determining banks capital structure in Sub-Sahara Africa.

since return on asset (ROA) is statistically significant and negatively impact short-term debt ratio,

the long-term debt and the total debt ratio, the management of banks in Africa should be concerned

with putting measures in place to enhance their return on assets . If banks should put measures in

place to increase and enhance their return on asset , it will reduce their debt ratios. A reduction in

banks debt ratios will enable them avoid some of the negative tendencies that is associated with

increasing financial leverage such as bankruptcy cost and financial distress. Banks should also have

more tangible assets which they can use generate more profit in order to reduce their debt ratios

since tangible asset is significant in determining their total debt ratio. Banks should also growth

their assets since asset growth reduces their long-term debt ratio significantly. The government and

monetary authorizes should put policies in place to curb inflation in order to avoid unanticipated

inflation, since unanticipated inflation reduces banks debt ratios because the cost of borrowing will

be very high.

However the finding of this study may not be reliable data used for this study are not current . The

data on banks’ capital structure and performance variables was gathered from 2000 to 2006; thus,

more current years are not considered; this may affect the extent of applicability of findings as the

phenomenon under study may have changed over the last few years. The reason for the inability of

this study to use current data is that, most of the banks analyzed in this study do not have data up to

date and this may be due to the fact that, most of the banks might have undergone mergers and

acquisition due the Basel II capital adequacy requirements that might have forced most of the banks

to merge. Further research can be done to include more recent data to cover the global financial

crisis period which this study could not cover.

48
2.5 Theoretical Framework Of Capital Structure

Capital structure of banks as other firms can be determined by both macro and micro factors. The

macro variables of the economy can be interest rate, inflation rate, tax policy and capital market

condition while the micro factors can be size, growth, tangibility among others. A lot of theories

like pecking order theory, trade-off theory, agency theory, signaling effect theory and bankruptcy

cost theory have explained the determinants of capital structure. But in general, many empirical

studies have examined the validity of these theories, but no consensus has emerged among

researchers as regards the theory that best explains the capital structure choice,( Aremu, Ekpo, &

Mustapha, 2013).

For the purpose of this research work, the theoretical framework relevant to the study will be

discussed below. The theories relevant to the studies are pecking order, trade-off, agency and

bankruptcy cost theories.

2.5.1 Pecking order theory

The pecking order theory based on assertion that firms use debt only when retained earnings are

insufficient and raise external equity capital only as a last resort. More recent models of capital

structure choice include ‘windows of opportunity’ and ‘managerial optimism’ Heaton, (2002).

Baker and Wurgler (2002) suggest that managers could minimize the cost of capital by timing the

market (issuing equity when share prices increase) implying that market conditions influence the

pecking order. However, Hovakimian (2006) shows that the timing of equity issuance does not have

any significant long-lasting impact on capital structure. In a quest for the factors that managers

consider in deciding the financing mix of a firm, many studies have examined the role of several

firm-specific factors. In a review article, Harris and Raviv (1991) resort the leverage is positively

49
related to non-debt tax shields, firm size, asset tangibility, and investment opportunities, while it is

inversely related to bankruptcy risk, research and development expenditure, adverting expenditure,

and firm’s uniqueness.

2.5.2 Trade-off theory

Myers (1984) and Myers and Majluf (1984) suggest that capital structure choice is driven by the

magnitude of information asymmetry present between the firm insiders and the outside investors.

The more severe the information asymmetry, the more risk the outside investors are facing and

hence the more discount they demand on the price of issued securities. Consequently, firms will

prefer financing through internal funds and if they do need to raise outside capital, they will firstly

issue risk-free debt then followed by low – risk debt. Equity is only issued as a last resort. As stated

in Myers (1984), the static trade-off theory proposes that the optimal debt ratio is set by balancing

the trade-off between the benefit and cost of debt. The benefit is debt arises from the tax

deductibility of interest payments on debt and the cost of debt comes in the form of higher

probability of bankruptcy and the loss suffered in the event of bankruptcy.

2.5.3 Agency theory

Jensen and Meckling (1976) predicted capital structure choice based on the existence of agency

costs, i.e. costs due to conflicts of interest. According to them, these are essentially two sources of

conflicts. Conflicts between shareholders and managers arise sine managers have an incentive to

consume on perquisites while putting less effort on maximizing profit for the firm. This is because

managers bear the entire costs of pursuing profit maximization while they do not receive the entire

gain. By increasing the level of debt, this agency cost of managerial discretion can be mitigated.

However, increasing debt level may give rise to another type of agency cost, namely conflicts

between shareholders and debt-holders. The conflicts arise due to shareholders incentive to invest in

sub optimal projects. If an investment earns a return well above the face value of debt, shareholders

50
would receive most of the gain, but if the investment fails debt-holders will bear all the cost because

the maximum amount that shareholders can lose is the amount of their investments (limited

liability). Consequently, shareholders will have preference for investing in highly risky projects

even though they are value-decreasing. This agency cost of debt financing is referred to as “asset

substitution effect”. Accordingly, the optimal capital structure choice involves balancing the trade-

off between the benefit of debt arising from mitigating the agency cost of managerial discretion

against the agency cost of debt arising from “asset substitution effect”.

2.5.4 Bankruptcy cost theory

Theories of capital structure pay little or no attended to the existence of bankruptcy costs. In a

perfect capital market, it is assumed that all company assets can be sold on their economic value

without acquiring the costs of liquidation. Nevertheless, in actual situations, such as liquidation

costs, legal fees and administration are significant (Warner, 1977; Haugen and Senbet, 1978,

Andrade and Kaplan, 1998). Moreover, assets may be sold at distress prices below their economic

value. Thus, its net realisable value is less than the economic value. The lenders will bear the cost

of ex post bankruptcy, but they will In the end, the shareholders bear the problem of ex ante

bankruptcy costs and lower valuation due from the company. A company with leverage has a larger

probability of bankruptcy than firms with no leverage. Hence, the cost of bankruptcy for firms with

high leverage is higher. However, the cost of bankruptcy is not a linear function of leverage. When

a company employs low levels of leverage in capital structure, bankruptcy risk is not considered.

Thus, there is no influence of bankruptcy cost on corporate valuation, until the threshold is reached.

Conversely, after a threshold level of leverage, bankruptcy becomes an existent threat. The

possibility of bankruptcy significantly increases with further application of leverage. Bankruptcy

costs rose at an increased rate beyond the stage of threshold.

2.5.4. Size and Leverage

51
The bankruptcy cost theory explains the positive relation between the capital structure and size of a

firm. The large firms are more diversified (Remmers Stonehill,Wright & Beekhuisen 1974), have

easy access to the capital market, receive higher credit ratings for debt issues, and pay lower interest

rate on debt Capital (Pinches and Mingo 1973). Further, larger firms are less prone to bankruptcy

(Titman & Wessels 1988) and this implies the less probability of bankruptcy and lower bankruptcy

costs. The bankruptcy cost theory suggests the lower the bankruptcy costs, the higher the debt level.

The empirical studies carried out during the 1970s, as suggested by this theory, also show the

positive relation between the size of firms and capital structure (Martin et al., 1988). But results of

some empirical studies do not corroborate with this theoretical relation.

2..5.6 Firm Growth and Leverage

The agency cost theory and pecking order theory explain the contradictory relation between the

growth rate and capital structure. Agency cost theory suggests that equity controlled firms have a

tendency to invest sub-optimally to expropriate wealth from the enterprises’ bondholders. The

agency cost is likely to be higher for enterprises in growing industries which have more flexibility

in their choice of future investment. Hence, growth rate is negatively related with long-term debt

level (Jensen and Meckling, 1976). This theoretical result is backed up by the empirical studies

carried out by kim and Sorensen (1986), and Titman and Wessels, (1988) but Kester, (1986) study

rejected this relation. Pecking order theory, contrary to the agency cost theory, shows the positive

relation between the growth rate and debt level of enterprises. This is based on the reasoning that a

higher growth rate implies a higher demand for funds, and, ceteris paribus, a greater reliance on

external financing through the preferred source of debt (Sinha 1992). For, pecking order theory

contends that management prefers internal to external financing and debt to equity if it issues

securities (Myers 1984). Thus, the pecking order suggests the higher proportion of debt in capital

structure of the growing enterprises than that of the stagnant ones. Chung (1993), Chaplinsky and

52
Niehaus (1990) showed the evidence contrary to the pecking order sand trade-off hypothesis

pleads for the low level of debt capital of risky theory.

2.5.7 Firm Age and Leverage

As a firm continues longer in business, it establishes itself reputation and goodwill and therefore

increases its capacity to take on more debt; hence age is positively related to debt. Before granting a

loan, banks tend to evaluate the creditworthiness of entrepreneurs ,this may include assessing it

years of existence , when it comes to highly indebted companies, they are essentially gambling with

their creditors money. If the investment is profitable, shareholders will collect a significant share of

the earnings, but if the project fails, then the creditors have to bear the consequences (Myers, 1977).

To overcome problems associated with the evaluation of creditworthiness, Diamond (1984)

suggests the use of firm reputation. He takes reputation to mean the good name a firm has built up

over the years; the name is recognized by the market, which has observed the firm’s ability to meet

its obligations in a timely manner.

2.5,8 Firm Profitability and leverage

The profitability of firms implies higher debt capacity and less risky to the debt holders. So, as per

this theory, capital structure and profitability are positively associated. But pecking order theory

suggests that this relation is negative. Since, as stated earlier, firm prefers internal order financing

and follows the sticky dividend policy. If the internal funds are not enough to finance financial

requirements of the firms, it prefers debt financing to equity financing (Myers 1994). Thus, the

higher profitability of the enterprise implies the internal financing of investment and less reliance

on debt financing, Aremu, Ekpo and Mustapha (2013). Most of the empirical studies support the

pecking order theory. The studies Titman and Wessel (1988),Kester (1986), Friend and Lang (1988),

Gonedes (1988) show that negative relationship exist between the level of debt in capital structure

53
and profitability Indian and Nepalese studies also show the same evidence as foreign studies do

(Baral, 1996). Only a few studies show the evidence in favor of static trade – off hypothesis

contention.

2.5.9. Firm Tangibility and leverage

Due to the conflict of interest between debt providers and shareholders (Jensen and Mekling, 1976),

lenders face risk of adverse selection and moral hazard. Consequently, lenders may demand

security, and collateral value (proxied by the ratio of fixed total assets) may be a major determinant

of the level of debt finance available to companies (Scott 1977), Stiglitz and Weiss (1981),

Willianmson (1988) and Harris and Raviv (1990).

The degree to which firms’ assets are tangible and generic should result in the firm having a greater

liquidation value. Capital intensive campanies will relatively employ more debt (Myers, 1977), as

pledging the assets as collateral (Myers, 1977; Harris and Raviv, 1991) or arranging so that a fix

charge is directly placed to particular tangible assets of the firm. Bank financing will depend upon

whether the lending can be secured by tangible assets (Storey, 1994; Berber & Udell 1998).

2.5.10 Interest rate and Leverage

Interest rate is the cost of borrowing for the firm, when a bank has the capacity to pay interest on

the borrowed amount this may entice the bank to take advantage of lower interest to apply for more

debt taking advantage of the lower rate, so also when the interest rate is high bank may tend to

result to using more of equity financing and avoid new debt. The findings of Ooi (1990) concluded

that the relationship between interest rate and leverage is negatively related, while Hung, Albert, &,

Eddie (2002).find out that there is a positive relationship between leverage and interest rate.

54
 SECTION THREE

STATEMENT OF METHODOLOGY

3.1 Introduction

This chapter would discuss the methodology that will be adopted for the study. It would explain the

research design, population of the study, sample size and sampling techniques adopted in the study.

It describes the method of data collection, analysis and interpretation as well as variables

measurement, research instrument and technique of statistical analysis of data.

3.2 Research Design

55
The study will adopt co relational and export facto research, the choice of correlation design is

because the study will try to find the relationship between capital structure and its determinants; the

study is also attempting to follow quantitative approach for trying to examine the determinants of

capital structure quantitatively. Ex-post facto design will also be adopted because the study

investigated the effect of independent variables on the dependent variable after the event under

investigation has taken place. Cresswell, (2014). Ex post facto design is a quasi-experimental study

examining how independent variables present prior to the study affect a dependent variable.

3.3 Population and sample of the Study

The population of the study will comprise all the listed Deposit money banks on the Nigerian Stock

Exchange as at 2015. Therefore, the population comprises all the seventeen (17) listed Deposit

money banks in Nigeria. The total numbers of firms are derived from the Nigerian Stock Exchange

(NSE) fact book as at 2015. The study is hoped to use all the 17 listed banks on the Nigeria stock

exchange as at 2015.

3.5 Method and Sources of Data Collection

The study will use secondary source of data only. The data for all the variables of the study will be

extracted from will be collected from the annual reports and account of the sampled companies,

Nigerian stock exchange fact book and other relevant sources for a period of seven (12) years (2004

to 2015). The banks are public limited companies listed on the Nigerian Stock Exchange. By virtue

of being public limited companies and as a requirement of being listed, annual financial report has

to be made available to the Nigerian Stock Exchange.

3.6 Techniques of Data Analysis

Multiple regressions will be used to analyze and statistically find the determinants of capital

structure of listed Deposit money banks. The data for the study is panel in nature (that is cross-

56
sectional time-series data). Panel data lead to errors that are clustered and possibly correlated

overtime.

The regression will be run in a panel manner; as such, various options of panel data regression

(generalized Least Square) will be run, like, random effect GLS regression and fixed effect (within)

regression as well as panel data robustness tests.

3.7 Robustness tests

In order to improve the validity of our statistical inferences, the following robustness tests will be

conducted:

i. multicollinearity test- VIF test

ii. heteroskedasticity test,

iii. hausman specification test,

iv. Langarangian multiply test

2.6 .Definition and Measurement of Variables

In this study, the researcher have used one dependent variable (Leverage = Debt to Equity Ratio)

and six explanatory variables such as profitability, tangibility, size, growth, age and interest rate

from most prominent and recent empirical studies. The selection measures for dependent variable

57
(leverage, which is proxy to capital structure) and independent variables (firms pecific) are detailed

as follows.

2.6.1.Dependent Variable (LEVERAGE)

Various measures of capital structure have been considered in the literature, however most studies

use a measure of leverage, that is a measure of the indebtedness of firms. There is no consensus on

what measure of leverage should be used. A number of studies consider debt ratio as a measure of

leverage ( Shyam Sunder &Myers (1999), Fama &French (2002) , Frank & Goyal (2002)). In the

following previous studies such as Rajan & Zingales (1995), and Ashenafi (2005), the researcher

considered one measure of leverage which is Debt to Equity Ratio. Debt to Equity ratio is,

therefore, given by:

DEBT TO EQUITY RATIO = Total liability

Total Share Holder Equity

2.6.2. Independent Variables

I. Size

According to Handoo & Sharman, (2014) Large firms are often more diversified and

have more assets and stable cash flows; the probability of defaults for large firms is smaller

compared to smaller ones. Thus the financial distress risk can be considered lower for larger

firms. The measure of a firm’s size used in this study is the natural logarithm of its total

Size is the measure of how large the firm’s operational capacity is. Various studies have used a

number of measures to capture the size of firms. Titman and Wessels (1988) and Benito (2003) use

the log of total assets to measure size. Similarly, this study also finds that the log of total assets to

be an appropriate measure of size.

SIZE =Natural Logarithm of Total Assets= ln (Total Assets)

II .Growth

58
Different studies have used varying measures of growth (investment opportunities). Titman and

Wessels(1988), used annual percentage increase in total assets as a measure of growth. This study

measures growth as a percentage increase in total assets of the commercial banks every year.

Growth = % change in Total Assets(TA)= T Assets Current year- T Asset previous year)*100

T Assets current year

Firms with growth options are those that have relatively more capacity expansion projects, new

product lines, acquisitions of other firms and maintenance ,and replacement of existing assets.

Firms with high growth options and high cash flow volatility have incentives to decrease debt in

their capital structure over a period of time. Growth is measured by the growth rate in total gross

assets. The growth factor is measured by the percentage change of assets Handoo e tal, (2014)

III Tangibility Collateral value of assets, also known as Asset Composition, are those assets that

creditors can accept as security for issuing the debt. The tangibility of assets represents the effect of

the collateral value of assets of a firm’s gearing level. Tangibility is then defined as the ratio of

tangible (fixed) assets to total assets. TANAGIBILITY =Fixed Asset

Total Asset

IV. Age of firms can be measured by the age of the firms. When a company exists longer in

business (which is represented by variable age),it usually creates a reputation especially in the mind

of creditors by fulfilling its payment obligations. This reputation was known in the market and

makes it easier to get debt financing. Age is measured by the number of years each bank stays in

business. AGE =Number of years in business.

V. Profitability

59
Profitability is a measure of earning power of a firm. The earning power of a firm is the basic

concern of its shareholders. Profitability is measured in several accepted ways and in this study;

profitability is measured as the ratio of operating income to total assets.

PROFITABILITY = Operating In come

Capital employed

profitability of banks is important to the creditors, owners, employees and management. Some of

the variables commonly used to measure banks profitability are Return on Asset, Return on Equity

and Net Interest Margin. Return on Asset (ROA) is calculated by net income or profit after tax over

total assets. It is also measured by net income over average total assets. Ramlali (2009), Flamini,

Donald and Schumacher (2009), Gul,Irshad and Zaman (2011), Khrawish, Siam and Khrawish

(2011),Aminu (2013)and Soyemi, Akinpelu and Ogunleye (2013) used net income over total assets

to measure ROA. While, Srairi (2009), Sufian (2011) and Antonina (2011) used net income over

average total assets to measure ROA

VI Interest rate

Interest rate (INT) refers to the cost of borrowing for the firm. It is the rate offered by financial

institutions, to be used as a benchmark to capture customer demand when acquiring loans

from institutions, better position to commit for the interest payment will allow a firm to apply more

debt because of the advantage of the low cost of borrowing. In contrast, when interest rates rise and

to avoid any potential financial distress, firms will exercise their equity financing and avoid new

debt. Ooi (1999) finds that the relationship between prevailing market interest rate and the debt

ratio is significant negatively related. However, Hung. (2002) find that there is a significant positive

relationship between leverage ratio and interest rate. Interest Rate is measured by average lending

rate as in Wahab& Ramli, (2014).

60
3.7 Model Specification

The model that examines the hypotheses of the study is specified as follows:

LEVit=αit + β1SZit + β2GRWTit + β3AGit + β4TANGit + β5PROFit + β6INTIt +εit

Where:

LEV= Leverage

SIZE = Size of the bank

GROWTH= Firm growth

AGE= Age

TANG= Tangibility of asset

PROF= Profitability

INT= Interest rate

α= Constant

ε= Error term

i= Bank

t= Time

Variable Variable Name Variable Measurement Source

Acronym

LEV LEVERAGE Measured as long term debt divide by total asset Ashenafi 2005

SZ SIZE Measured as Natural logarithms of banks Handoo &

earnings (turnover). Sharman 2014

GRWT GROWTH Measured as Percentage increase in net total Handoo &

asset. Sharman 2014

AG AGE Measured Number of years which the firm was Aremu, Ekpo

incorporated. and Mustapha

61
 2013

TAN TANGIBILITY Measured fixed asset divided by Net total asset Berber &

Udell 1998

PROF PROFITABILITY Measured by Return on asset (profit before tax Aminu 2013

divide by total asset) and Soyemi,

Akinpelu &

Ogunleye

2013)

INT INTEREST RATE Yearly average lending rate. Wahab&

Ramli, 2014

The choice of correlation design is because the study aimed at finding the relationship between firm

size, firm growth, tangibility, age, profitability, interest rate and leverage. While ex-post facto

design will also be adopted because the study will investigate the effect of independent variables on

the dependent variable after the event under investigation has taken place (the study relied upon

historical data). The study will follow quantitative approach to ascertain the determinants of capital

structure of listed Deposit money banks in Nigeria. Therefore, in line with the objectives and

hypotheses formulated we would make use of multiple regressions to determine the impact of

independent variables on the dependent variable, because it is the most suitable techniques for

determining the extent of impact of independent variables on dependent variable. Stata Statistical

Package will be used because it allows ascertaining the impact of the independent variables on the

dependent variable as well as testing for robustness such as heteroskedasticity test, fixed and

random effect test, multicollinearity test etc.

62
63
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1Introduction

This chapter covers data presentation, analysis, interpretation, and discussion of the results of the

study. Hence, results from the descriptive statistics, the correlation matrix, the robustness test, and

the regression results are presented and discussed. The chapter also discusses the implications of the

research findings.

4.2 Descriptive statistics

Table 4.1 presents descriptive statistics of the variables of the study. The mean, standard deviation,

minimum, and maximum have been used to describe the data

Table 4.1: Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

Leverage 110 .30975 .95261 .8307799 .08417767

Firm size 110 10.19884 21.89710 16.6836475 3.29385592

Firm growth 110 -2.21986 2.17534 -.0362770 .59700955

Age 110 .30103 2.49136 1.5290246 .52995807

Tangibility 110 .00878 .64151 .2618170 .13068804

64
Interest rate 110 9.00000 19.99000 13.2777273 3.16695312

ROI 110 -.04586 .32998 .0437901 .06671938

Source: The Author, 2016

From the table above, leverage ranges from the minimum of 0.3936 to a maximum of 0.9526, while

the mean is 0.8308. This shows that on average, the sampled firms have 83% as total debt in their

capital structure during the period under review. The minimum value is an indication that some

banks have as low as 39% of leverage, while some banks have up to 95% as total debt in their

capital structure. The standard deviation of 0.0842 signifies that the data deviate from the mean

value from both side by 8% implying that the data is not dispersed widely from the mean. This also

proved that the sampled banks have more of leverage than equity financing in their capital structure.

Furthermore, firm size (natural log of total assets) has a mean of 16.6837, while the minimum and

maximum are 10.1988 and 21.8971 respectively. The standard deviation is 3.2939. This shows that

the values are centered around the mean value i.e. there is not much dispersion away from the mean

because, the standard deviation is less than the mean. Firm growth has a mean of -0.0363, while the

range is from the minimum of -2.2199 up to a maximum of 2.1753. This shows that on average the

banks have annual firm growth of -4%. The deviation of 0.5970 is an indication that there is much

dispersion around the average firm growth by 60%. Some banks achieved the maximum of 20%

firms’ growth, while some banks resulted in negative growth as low 20%. The banks’ age has a

minimum of 0.3010 and a maximum of 2. 4913. The mean age is 1.529 while the standard deviation

is 0.52996 implying the age, measured in term of number of years since incorporation is not widely

dispersed away from the mean age. Moreover, tangibility has a mean of 0.2618; the range is from

the minimum of 0.0878 to a maximum of 0.6415. This shows that on average, the banks’ tangible

asset in relation to total asset is up to 26% during the period. However, the minimum of 0.0878 is an

65
indication that some banks had only 9% as tangible assets; while on the other hand, some banks

have up to 64% as tangible asset in proportion to total assets. The mean value for interest rate is

N13.28k. The minimum interest rate during the period was fixed at N9.00k while the maximum was

at N19.99k. The standard deviation of 3.17 was an indication that the interest rate was normally

distributed during the period. This is because, it is far below the mean average. The ROI has a mean

of 0.04379, indicating that the banks were able to generate returns on investment of 4% during the

period. The maximum of 0.32998 is a clear indication that some banks were able to generate ROI to

the tune of 33%; while the minimum of -0.04586 is showing that some banks lost ROI to the tune of

5%.

Table 4.2: Correlation Matrix

Leverage Firm Firm Age Tangibility Int. Return

size growth rate on inv.

Leverage 1.0000

Firm size 0.3076* 1.0000

Firm growth -0.1510 0.1254 1.0000

Age -0.0202 0.3163* 0.1520 1.0000

Tangibility 0.2534* -0.0220 -0.0201 0.2111* 1.0000

Interest rate -0.2740* 0.0951 0.0133 0.0141 -0.0855 1.0000

66
Return on -0.4394* -0.1892* 0.0148 0.0013 -0.1124 -0.1755 1.0000

In

Source: The Author, 2016

* At 5% level of significance

The correlation matrix is used to determine the degree of association between independent variables

and dependent variable. It is also used to identify whether there is relationship among the

independent variables themselves, to be able to detect if multicollinearity problem may exists.

From the table above we can see that the correlation coefficient between firm size and leverage is

0.308 significant at 1% level. This suggests that there exist a strong significant positive association

between firm size and leverage of listed DMBs in Nigeria. The relationship between Firm Growth,

Age and leverage are found to be negative though, statistically insignificant. This can be confirmed

from the correlation coefficient value -0.15 and -0.020 respectively. Furthermore, the association

between tangibility and leverage is found to be positive and statistically significant. This can be

observed from the correlation coefficient of 0.253 and the significant value of 0.008. Additionally,

the correlation coefficient of Interest Rate is -0.274 (0.004), while that of Return on Investment

(ROI) is -0.439 (0.00). This suggests a significant negative association between interest rate and

leverage at 1% level; moreover, the statistical result further suggests a strong negative association

between ROI and leverage of listed DMBs in Nigeria.

The relationships between independent variables themselves suggest to be minimal. In order to see

whether the presence of multicollinearity will pose a problem to the statistical inferences, the study

further conducted multicollinearity test, using Variance Inflation Factor (VIF) and tolerance value.

The test reveals absence of multicollinearity, because VIF are consistently smaller than 10 while its

reciprocal are consistently less than 1. The mean VIF for all the independent variables is 1.11. This

67
suggests that the presence of multicollinearity is not enough to invalidate the statistical inference of

the research finding.

4.3 Reliability and validity tests

To avoid making wrong inferences, some robustness tests were conducted and the summary of the

statistical results can be depicted from table 4.3 below.

Table 4.4: Summary of Robustness Tests

Statistics P-Values

Hausman-Chi2 8.51 0.2028

LMTRE-Chi2 0.00 1.000

Hettest-Chi2 37.97 0.000

Mean VIF 1.11

Source: The Authors, 2016

68
Note: LMTRE is ‘Breusch and Pagan Lagrangian Multiplier Test for Random Effect’

Data for the study is panel in nature and panel data may lead to error that are clustered and possibly

correlated overtime. This is because each bank may have its own entity specific characteristic that

can determine its capital structure (i.e. unobserved heterogeneity). And this may bias the outcome

variable or even the explanatory variables. As such there is need to control for that. For that

purpose, fixed effect (FE) regression and random effect (RE) regression were ran. The Hausman

Test suggest that RE regression is more appropriate for the data. This can be confirmed from the

Chi2 value of 8.51 with a probability value of 0.2028. This suggests that entity specific attributes

have no significant effect on the outcome variable.

Since the hausman test suggests the RE regression result, then there is need to further conduct

another test to see whether there is a statistical variance among the unit in the panel. To test for that,

‘Breusch and Pagan Lagrangian Multiplier Test for Random Effect’ was adopted. Finally, the test

result reveals that there is no statistical significant variance among the unit in the panel data all.

This can be observed from the chi2 value of 0.00 and a P-value of 1.00. Thus, this suggests that

OLS technique is more appropriate for the data of this study.

However, after running hettest, the study observed the presence of heteroskedasticy in the panel

data; as such the basic OLS would not be reliable. This can be confirmed from the hettest result

which revealed the chi2 value is 37.97 with a p-value of 0.000. In order to correct for this

anomalies, Robust OLS was used; and hence, the inference will be made based on the results

produced by the Robust OLS regression.

In addition to that, multicollinearity test was also conducted using VIF and its reciprocal (1/VIF)

i.e. tolerance value. No multicollinearity threat was found; as the VIF are consistently smaller than

10 while the tolerance values are consistently smaller than 1. The mean VIF is 1.11. All this proved

69
that multicollinearity will not pose a problem to our inference and suggest the appropriateness of

the model in fitting the independent variables of the study.

Table 4.3: Summary of Robust OLS Regression

coefficient t-statistics Probability value

Constant 0.8355 21.97 0.000

Firm size 0.0085 3.07 0.003

Firm growth -0.0220 -2.84 0.005

Age -0.0222 -2.34 0.019

Tangibility 0.1355 2.90 0.005

Interest rate -0.0095 -2.88 0.005

ROI -0.5210 -7.18 0.000

R2 0.461

F- statistics 22.71 0.000

Source: The Author, 2016

From the table, the t-value for firm size (FS) is 3.07 and a beta coefficient is 0.008 with a p-value of

0.003. This implies that FS has a significant positive effect on leverage of listed DMBs in Nigeria at

1% level. The beta coefficient indicates that an increase of FS by 1% will cause leverage to increase

by 0.008 (measured in term of natural log). The implication of this finding is that the higher the

firm size the higher the leverage of listed DMBs in Nigeria. This provides evidence to reject the

null hypothesis earlier formulated, which states that FS does not have significant impact on

70
leverage of listed DBMs in Nigeria. The finding is in line with those of Marsh (1982) and Rajan and

Zingales (1995)

The impact of firm growth on leverage is found to be negative and statistically significant at 5%

level. This can be confirmed from the t-value of -2.84 and a p-value of 0.005. This implies that firm

growth have significant impact on leverage of listed DMBs in Nigeria. The beta coefficient shows

of -0.022 shows that leverage reduces by 2.2% with an increase in firm growth by 1%. Therefore,

the finding also reject the null hypothesis which stated that FG has no significant effect on the

leverage of listed DMBs in Nigeria. This finding supports the finding of long and Malizt(1985) and

contradicts the finding of Titman and wessels(1988)

The beta coefficient and t-value of Age are -0.022 and -2. 34 respectively, with a p-value of 0.019.

This shows that Age has a significant negative impact on leverage of listed DMBs in Nigeria,

though at 10% significant level. The beta coefficient is explaining that as the year of incorporation

increase by one year the proportion of debt in the total asset will reduced 2.2%. The implication of

this finding is that the higher the age the lower is going to be the leverage ratio. This provides

evidence to reject the null hypothesis stating that Age does not have significant impact on leverage

of listed DMBs in Nigeria. The finding has gotten support empirically from the works of shehu

hassan (2011,) this however contrary to our prior expectation which was baseed on the findings of

daimond (1984)

Tangibility has a t-value of 2.90 and a beta coefficient of 0.135 with a p-value of 0.005. This

implies that Tangibility has a strong significant positive effect on leverage of listed DMBs in

Nigeria at 1% level. The beta coefficient indicates that an increase of Tangibility by 1% will cause

leverage to increase by 13.5%. The implication of this finding is that the higher the tangibility the

71
higher the leverage of listed DMBs in Nigeria. This provides evidence to reject the null hypothesis

which states that Tangibility does not have significant impact on leverage of listed DBMs in

Nigeria. The finding is in tandem with those of meckling (1976) and Myer (1977)

Furthermore, interest rate is found to have a significant negative impact on DMBs in Nigeria. This

can be confirmed from the t-value of -2.88 and a probability value of 0.005. The implication of this

finding is that DBMs in Nigeria avoid including debt in their capital structure when the interest rate

is high. The coefficient of -0.009 is an indication that leverage reduces by 0.9% when interest rate

increases by 1%. As such, this finding is line with that of the researcher and contrary to that of

Ooi .J (1999).

The impact of ROI on leverage is found to be negative and statistically significant at 1% level. This

shows that the impact is very strong; this can be confirmed from the t-value of -5.453 and a p-value

of 0.000. This implies that ROI has a significant impact on leverage of listed DMBs in Nigeria.

Therefore, the finding also reject the null hypothesis which states that ROI has no significant effect

on the leverage of listed DMBs in Nigeria. This finding supports the finding of Rajan and zingales

(1995)

The overall result shows that (R2) has the value of 0.461. This indicates that the explanatory

variables were able to explain the variation in the dependent variable (leverage) to the extent of

46%. The other 54% is explained by other factors not captured in the model. This could be both

macro and micro variables that can also explained changes in leverage. The adjusted R 2 has a value

0.429 (43%). This implies that Firm size, firm growth, age, tangibility, interest rate, and return on

investment play a significant role in explaining the leverage of listed DMBs in Nigeria. The

regression result reveals fitness of the model with F-statistics of 22.71 and a p-value of 0.0000.

72
Finally we come to conclude by saying that all the independent variables of the study determined

the leverage of listed DMBs in Nigeria.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

73
Capital structure can be said to a pivot upon which all banking activity revolve, and if well

determine will support the bank in it operation by providing a buffer to absorb unanticipated loses

from it activity. The paper investigated the determinant of capital structure in Nigeria deposit

money banks from 2004 to 2013 . The population of the study comprises seventeen (17) DMBs

listed on the Nigerian Stock Exchange (NSE) as at December, 2013. Out of which ten (10) banks

constitute the sample size of the study. The study adopted both correlation and ex-post facto

research design. The data for the study was purely from secondary source obtained from the annual

reports of the sampled banks. Data was analyzed using several options of multiple panel data

regression. But the most reliable of all is robust ordinary lease square regression as suggested

by‘Breusch and Pagan Lagrangian Multiplier Test for Random Effect’.The results revealed that firm

size, firm growth, age, tangibility, interest rate and return on investment have significant impact on

leverage, the result approve the prediction of trade –off theory in case of firm size ,firm growth and

interest rate, while tangibility and return on investment support pecking order theory, The study

recommends that major players such as bank managers, financial analysts, policy makers And all

stake holders in the banking sector should use the five variables of capital structure determinant as

yardstick in determining their capital structure enable the banks operate at optimal level.

5.2 Conclusions and Recommendations

This study examines the determinants of capital structure of Banks in Nigeria. Previous researches

mainly focus on micro element of to determinant of capital structure ignoring the macro element

that affect the determinant of capital structure . The study discussed the determinant of capital

74
structure the capital structure in Nigerian Banking industry covering the 10 banks in the country

from 2004 to 2013

The study analyzed whether the determinants of capital structure as posited by various authors

affect the capital decisions of these banks. The study therefore use database which has not been

used for the examination of the capital structure before in Nigeria.

As a result of this research findings, it is found that the main determinant factors which contribute

to the bank leverage level of the Banking industry in Nigeria between the years 2004 to 2013 are

mainly bank size, growth, age, tangible assets, growth, return on investment and interest rate.

The study recommends that major players such as bank managers, financial analysts and policy

maker will have better understanding about the factors which may influence the capital structure of

the Nigerian banking sector and enhance competitiveness in the banking sector. And all stake

holders in the banking sector should use the five variables of capital structure determinant as

yardstick in determining their capital structure enable the banks operate at optimal level.

5.4 Limitations of the study

Like most studies, this research work is subject to a number of limitations. The limitations include:

i. The limitation of the study is the issue of survivorship bias related to the period of study; as

only foods and beverages firms being listed on the NSE between 2007 and 2013 were

75
 included. Hence, firms with short histories (not listed within the period) were excluded. The

study should have used all the twenty-one firms, but dearth of data and survivorship bias

hindered the use of all the firms.

ii. There are various models for detecting the extent of earnings management, but this study

restricts itself to the use of Dechow et al. (1995) model. This is because, it is the model used

by most researchers (including Gulzar and Wang (2011) and Johari et al. (2008)) and was

proved to produce minimum error.

iii. In the literature, Board Competency has been defined in two ways: Board Competency in

term of directors’ knowledge in the field of accounting and/or finance and Board

Competency in term of directors’ years of experience on a board. This study examined the

influence of Board Competency in term of directors’ knowledge of accounting and/or

finance on earnings management.

5.5 Suggestions for Further Research

i. This study examined the effect of Board Competency, frequency of Board Meetings and

Gender Mix on Earnings Management of listed foods and beverages firms for the period

2007 to 2013. The period of the study can be extended to 2015; there are other Board of

directors attributes that were not captured in this study. All these need to be revisited to

capture some changes that might have occurred.

ii. The same Board Characteristic’ variables used in this study can be examined in another

domain/sector to see whether or not the research findings would be similar.

76
iii. Further research should examine the effect of Board Competency (in term of directors’

years of experience on a board) on Earnings Management.

iv. Further research is needed on the impact of independent director’s competency on earning

management.

77
78
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