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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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