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RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FIRM VALUE IN NIGERIA
A CASE STUDY OF NIGERIA BOTTLING COMPANY JOS PLATEAU STATE
ABSTRACT
This study examined the empirical effects of capital structure (financial leverage) on the market value of a selected firms listed on the Nigerian stock exchange. Both primary and secondary data were obtained for analysis employing both descriptive and inferential statistics for analysis. A sample size of fifty (50) respondents and a firm (Nigeria bottling company, Jos) was selected for both primary data and secondary data respectively. Descriptive statistics was used to analyze the primary data, while chi-square was used to draw inferences of the relationship between capital structure and firm’s choice of capital structure and its market value in Nigeria. The study suggested that listed firms in Nigeria should strategically plan and manage their capital structure in order to maximize their market values.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
After the Modigliani-Miller (1958 and 1963) paradigms in firms capital structure and their market values, there have been considerable debates, both in theoretical and empirical researchers on the nature of relationship that exist been a firms choice of capital structure and its market value. Debates have centered on whether there is an optional capital structures for an individual firm or whether the proportion of debt usage is relevant to the individual firm value. Although, there have been substantial research efforts devoted by different scholars in determining what seems to be an optimal capital structure for firms, yet there is no universally accepted theory throughout the literature explaining the dept equity choice of firms. But in the last decades, several theories have emerged explaining firm capital structure and the resultant effects on their market value. These theories include the pecking order theory by Donaldson (1961), the capital structure relevance theory by Modigliani and Miller (1963), the Agency cost theory, the capital signaling theory and the trade-off theory (Bokpin and Isshag 2000).
In Nigeria, financial constraints have been a major factor affecting corporate firm’s performance. According to Salawu and Agboola (2008), the move towards a free market, coupled with the widening and deepening of various financial markets has provided the basis for the corporate sectors to optimally determine theory capital structure. According to Alfred (2007) he suggested that a firm’s capital implies the proportion of debt and equity in the total capital structure of the firm. Pandey (1999) differentiated between capital structures and financial structure by affirming that the various means used to raise funds represent the firm’s financial structure, while the capital structure represents the proportionate relationship between long term debt and equity capital. Therefore, a firm’s capital structure simply refers to the combination of long term debt and equity financing. However, whether or not an optimal capital structure exists in relationship to firm value is one of the most important and complex issues in corporate finance.
1.2 STATEMENT OF THE PROBLEM
Although, the capital structures issue has received substantial attention in developed countries, it has remained neglected in the developing countries most especially in Nigeria. The reasons for this neglect according to Bhaduri (2002) was that until recently, developing economies have placed little importance to the role of firms in economic development, as well as the corporate sectors in many developing countries faced several constraints on their choice regarding sources of funds, and that access to equity market, was either regulated or limited due to the under developed stock market. In Nigeria, in determining the actual effect a firm’s capital structure has on its market value has been a major challenge among researchers. Particularly specifying what capital mix seems to optimize firm’s value has been a difficult thing to unravel. There has been a limited number of studies in Nigeria that have examined the firm’s choice of capital structure and its market value, but only a few of the findings ever expressed that a firm’s choice of capital structure could be influenced by the impact it has on its market value. Also the capital structure decision of a firm is a significant managerial decision; it influences the shareholders return and risk and subsequently affects the market value of the firm.
1.3 OBJECTIVES OF THE STUDY
The objective of this study is aimed at investigating the nature of relationship that seems to exist between a firm’s choice of capital structures and its market value in Nigeria. Other objectives include:
i. Identifying the general pattern in the capital structures of an organization in Nigeria.
ii. Examining the relationship that exists between corporate capital structure and corporate market values.
iii. Examining the effect of capital structures on a firm’s value of an organization.
1.4 RESEARCH QUESTION
The following research questions were formulated to guide this study:
i. To what extent do corporate capital structures affects corporate market values in Nigeria.
ii. What is the general pattern in the capital structure of quoted firms in Nigeria
1.5 STATEMENT OF HYPOTHESIS
This work is to ascertain whether there is relationship between corporate capital structure and firms value in Nigeria. The following hypothesis was formulated:
Ho: There is no significant relationship between corporate capital structure and corporate market values in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This study contributes to the existing body of knowledge as well as make up for the paucity of scholarly papers in Nigeria on a firm’s capital structures and its market values. Also the findings of this study will aid an effective and efficient financing decisions of firms in Nigeria. Also consultant and financial analyst will find the study helpful in their financial and advisory services to failing and distressed companies.
1.7 SCOPE OF THE STUDY
The scope of this study was limited to a firm in Nigeria as obtained in the Nigeria bottling company PLC, Jos, Plateau state as well as restricted to the targeted population within plateau state. This is perceived necessary in order to keep the study within controllable level. This study however was limited by a number of factors among which were financial constraints suited in Nigeria bottling company PLC. And to research papers on related study and reticence exhibited by some respondents.
1.8 DEFINITION OF TERMS
The following terms are defined as used in this study:
CAPITAL STRUCTURE: According to Kennon (2010) refers to the percentage of capital (money) at work in a business. Alfred (2007) stated that a firm’s capital structure implies the proportion of debt and equity in the total capital structure of the firm.
FINANCIAL STRUCTURE: Pandey (1999) states that the various means used to raise funds represent the firm’s financial structure.
FIRM VALUE: Is the total economic value of a company, reflecting the value to be collected to the company’s shareholders and debt holders. It is also a measure of a company’s often used as an alternative to straight forward market capitalization.
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION
With the improvement of business management and decision making level of enterprise, corporate decision making on finance not only pay more attention to the size of finding but also to financing option and the finance structure in order to increase the market value of the organization and maximize investors interest.
Financing pays an important and significant role to improve financial decision-making level and optimize the capital structure and firm value.
2.2 DEFINITION OF CAPITAL STRUCTURE
The term capital structure according to Kennon (2010) refers to the percentage of capital (money) at work in a business by type. Capital structure in finance refers to the way a corporation finances its assets through some combination of equity, debt or hybrid. There are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate stewardship and management is attempting to find the perfect capital structure in terms of risk and reward pay off for shareholders. Alfred (2007), started that a firms capital structure implies the proportion of debt and equity in the total capital structure of the firm. Pandy (1999) differentiated between* capital structure and financial structure of a firm by affirming that the various means used to raise funds represent the firms financial structure, while the capital structures represents the proportionate relationship between long term debt and equity.
The capital structure of a firm as discussed by Imanya and Ajayi (1999) does not include short term credit, but means the composite of a firm long term funds from various sources. Therefore, a firms capital structure is described as the capital mix of both equity and debt capital in financing its’ assets. However, whether or not an optional capital structure exists in one of the most importance and complex assures in corporate finance.
2.3 COMPONENTS OF A FIRM’S CAPITAL STRUCTURE
The various components of a firms capital structures according to Inanga and Ajayi (1991) may be classified into equity capital, preference capital and long term loan (debt)capital.
REFERENCES
Lillian Cyril Freeman (1971): “Modern marketing for Nigeria” Lagos, Macmillan Press Ltd 1st edition.
Kinner/Kenneth (1983) “Fundamental of modern marketing practice” Hall inc. Eaglewood Chief 9thEdition.
Sinner, J Ler (1969) “Marketing management analysis planning, implementation and control” Eaglewood Cliff; Prestice Hall Inc 9th Edition
Internet: www.googlesearch.com the origin of Nasco company Group on Nigeria
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