Journal of Finance and Investment Analysis

Topic: capital structure determinants of quoted firms in Nigeria and lessons for corporate financing decisions

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• Abstract

  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 in debt 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 tradeoff between costs and net tax advantage of additional leverage and costs and benefits of equity in firm capital structure.