Capital Structure In Nigeria Case Study

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THE DETERMINANTS OF CAPITAL STRUCTURE OF NIGERIAN BUSINESS FIRMS: A PANEL DATA STUDY Oba Efayena INTRODUCTION Capital structure decision is one of the most important decisions facing the financial manager. It is one of the most researched fields in corporate finance. However most of the researches on capital structure were carried out in the developed countries but with very limited amount of work done on developing countries, for example by Hamid & Singh (1992), Singh (1995), Hussain (1995), Brada & Singh (1999), Prasad (2000), Booth, Aivazian, & Demirguc-Kunt (2001) and Salawu (2007). The research problem that would be addressed in this study is: To what extent do the factors determining capital structure choice identified in studies of capital structure carried out in developed countries apply to Nigeria? Which of the capital structure theories apply to Nigeria: the trade-off theory or the Pecking order theory? This paper conducts a critical survey of the key literature in order to isolate the leading theoretical and empirical issues surrounding capital structure choice of firms in developed economies and apply these to firms in Nigeria in order…show more content…
According to the trade-off theory of capital structure, the market value of a firm at first increases as the firm introduces debt capital into its capital structure, but finally decreases as the cost of financial distress (due to the riskiness of debt capital) outweighs the advantages of the interest tax shields. The theory suggests that firms would choose leverage levels that balance interest tax shields against the costs of financial distress. This is the optimal capital structure that maximizes the value of the

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