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THE DEVELOPMENT OF DEBT TO EQUITY RATIO IN CAPITAL STRUCTURE MODEL: A CASE OF NIGERIAN MANUFACTURING FIRMS

European Journal of Economic and Financial Research

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Title THE DEVELOPMENT OF DEBT TO EQUITY RATIO IN CAPITAL STRUCTURE MODEL: A CASE OF NIGERIAN MANUFACTURING FIRMS
 
Creator Ezeaku, Hillary Chijindu
Ageme, Anthony E.
Ogbodo, Izuchukwu
Eze, Eze Festus
 
Subject capital structure, manufacturing firms, cointegration, panel FMOLS
 
Description The arguments on the responsiveness of capital structure leverage to sets of its major determinants have dominated the corporate finance literature. There is however no consensus regarding the direction of effects of these determinants on debt to equity ratio. In contribution to existing literature, this study explored development of debt to equity ratio in capital structure in the Nigerian context, with aim of filling gaps in methodology which have been argued to undermine the credibility of previous findings. The method of estimation used is the Panel-Fully Modified Ordinary Least Squares (FMOLS). The Pedroni cointegration test was employed to test for long-run relationship. The descriptive statistics and the panel unit root test were the preliminary test. We ascertained that our data set are stable and normally distributed as precursor to determining if the variables are cointegrated. A more sophisticated method of panel estimation other than the traditional method was adopted which among other advantages purges the defects posed by heteroskendasticity prevalent in the conversional estimation method. We established that there is a long-run relationship between debt to equity ratio and tangibility, profitability, firm growth and firm size. The panel regression estimate confirmed the trade-off theory and the pecking order hypothesis in Nigeria as tangibility was found to have positive effect on corporate leverage. However, the finding with regards to growth and firm size supports the trade-off theory while discrediting the pecking order assumption. Profitability on the other hand confirmed the pecking order theory for Nigeria and shows that profitability has negative effect on debt to equity ratio. The robustness and reliability of the findings was embedded on the controls for residual weaknesses and disturbances.JEL: L60, O14, D24  Article visualizations:
 
Publisher European Journal of Economic and Financial Research
 
Contributor —
 
Date 2017-09-20
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier https://oapub.org/soc/index.php/EJEFR/article/view/138
 
Source European Journal of Economic and Financial Research; Volume 2, Issue 5, 2017
 
Language eng
 
Relation https://oapub.org/soc/index.php/EJEFR/article/view/138/588
https://oapub.org/soc/index.php/EJEFR/article/view/138/589
https://oapub.org/soc/index.php/EJEFR/article/view/138/590
 
Rights Copyright (c) 2017 Hillary Chijindu Ezeaku, Anthony E. Ageme, Izuchukwu Ogbodo, Eze Festus Eze