THE IMPACT OF DEBT FINANCING ON VALUE OF NIGERIAN FIRMS
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THE IMPACT OF DEBT FINANCING ON VALUE OF
NIGERIAN FIRMS
ABSTRACT
The
issue of value creation for stakeholders of the firm as a result of the
composition of its financial mix can be traced to the seminal work of
Modigliani and Miller (MM) in 1958. Their argument is the irrelevance of the
financing mix of firms on value. Thus, whether the firm uses equity or debt,
the value of the firm does not change. There have been several theories after
the works of MM carried out by several scholars either criticizing or
supporting the Modigliani and Miller Irrelevance theorem. The Trade-off theory
of capital structure suggests that there is an advantage to finance the firm
with debt and also a cost of financing with debt. As a result, firms are
assumed to trade-off the tax benefits of debt with the bankruptcy cost of debt
when making their financing decisions. However, present and potential investors
need single information which is, the value creating potential of the firm no
matter the composition of the firm’s financing mix. Therefore this study had
the following objectives; to determine the impact
of debt financing on the ability of the firm to make profit; to determine the
impact of debt financing on the ability of the firm to maximise the use of its
assets; to determine the impact of debt financing on the firm’s earning power
on per share basis; to determine the impact of debt financing on the ability of
the firm to reward shareholders on per share basis; to determine the impact of
debt financing on the firm’s ability to meet its’ financial obligations as at
when due and to determine whether debt financing enhance the value of Nigerian firms. The ex post facto research design was adopted to enable the researcher
make use of secondary data and determine cause-effect relationship for
twenty-eight quoted Nigerian firms for the period 2004-2008 on a firm by firm
as well as on aggregate basis. The Ordinary Least Square (OLS) estimation
technique was adopted using SPSS statistical software to evaluate objectives
one to five where ratio values of Total Debt Rate (TDR) was used as the
independent variable while Net Profit Margin (NPM), Total Asset Turnover (TAT),
Earnings Per Share (EPS), Dividend Per Share (DPS) and Current Ratio (CR) as
dependent variables, while adopting a bankruptcy model, the Multiple Discriminant Analysis Model (MDA) to
evaluate objective six using MDA’s Z-score benchmark of 2.675 to determine
value (Rashmi and Sinha, 2004; Xing and Cheng, 2005). The study revealed that
on a firm by firm basis there were mix variations of the impact of Total Debt
Rate on the firms’ value parameters (NPM, TAT, EPS, DPS and CR) across firms
sampled while on aggregate basis; there was a positive non-significant impact
of Total Debt Rate on Net Profit Margin;
there was a negative non-significant impact of Total Debt Rate on Asset
Turnover Rate; there was a positive non-significant impact of Total Debt Rate
on Earnings per Share; there was a positive non-significant impact of Total
Debt Rate on Dividend per Share and there was a negative non-significant impact
of Total Debt Rate on Current Ratio and twenty firms created value as a result
of the firms’ use of debt financing representing 71.4% of firms sampled while
eight firms representing 28.6% of firms did not create value. From the
foregoing therefore, the use of debt financing enhances the value of Nigerian
firms, thus could be used to enhance shareholders’ wealth, however further
studies could still be carried out as to determine why some firms did not
enhance value as a result of the used of debt finance in the financial mix of
Nigerian firms .
TABLE OF CONTENTS
Title
Page i
Approval
Page ii
Certification
Page iii
Dedication iv
Acknowledgements v
Abstract vii
List
of Tables xi
List
of Figures xii
List
of Appendixes xiii
Chapter One
Introduction 1
1.1 Background of the Study 1
1.2 Statement of the Problem 4
1.3 Research Objectives 8
1.4 Research Questions 8
1.5 Hypotheses of the Study 9
1.6 Scope of the Study 9
1.7 Significance of the Study 10
1.8 Limitation of the Study 11
1.9 Definition of Terms 11
References 13
Chapter Two Review
of Related Literatures 16
2.0 Introduction 16
2.1 The Nigerian Stock Exchange 18
2.2 The Financing Decision of the Firm 19
2.3 The Concept of Debt and Debt Financing 20
2.4 The Concept of Value of the Firm 24
2.5 Valuation Methods 25
2.5
.1 Capital Asset Pricing Model (CAPM) 25
2.5.2 Discounted Value Method 26
2.6 The Concept of the Firm’s financing
Structure 27
2.6.1 Trade-off Theory 30
2.6.2 The Pecking-order Theory 32
2.6.3 The Agency-cost Theory 32
2.7 Overview of the Modigliani and Miller
Theorem 36
2.8 Bankruptcy,
Cost of Bankruptcy and Effect on the Firm 41
2.9 The Concept and Uses of Financial Ratios 44
2.10 Profitability and Debt Financing of the
Firm 48
2.11 Asset Utilization and the Value of the Firm 48
2.12 Shareholders Earnings (EPS) and the Firm’s
Value 49
2.13 Dividends, Dividends Decision and Value of
the Firm 51
2.14 Liquidity and the Firms’ Value 57
2.15 The Concept of Multiple Discriminant
Analysis 58
References 63
Chapter Three Research
Methodology 75
3.1 Research Design 75
3.2 Sources of Data 75
3.3 Sample Size 76
3.4 Sampling Technique 76
3.5 Model Specification 77
3.5.1 Model Justification 79
3.5.2 Assumptions for Multiple Discriminant
Analysis 80
3.5.3 Explanatory Model Proxies 81
3.6 Techniques of Analysis 83
3.6.1 The
Correlation Coefficient 83
3.6.2 The Coefficient of Determination (r2) 84
3.6.3 Durbin Watson (d) Test 84
3.6.4 The Student T-test 85
References 86
Chapter Four Presentation
and Analyses of Data 88
4.0 Introduction 88
4.1 Data Presentation 88
4.2 Test of Hypotheses and Analyses of Data 95
4.2.1 Test of Hypothesis One 95
4.2.2 Test of Hypothesis Two 103
4.2.3 Test of Hypothesis Three 112
4.2.4 Test of Hypothesis Four 121
4.2.5 Test of Hypothesis Five 129
4.2.6 Test
of Hypothesis Six 137
References 141
Chapter Five Summary
of Findings, Conclusions and Recommendations 142
5.0 Introduction 142
5.1 Summary of Findings and Policy
Implications 142
5.1.1 Comparison of the Findings with the Objectives
of the Study 145
5.2 Conclusion 148
5.3 Recommendations 151
5.3.1 Recommendation for Selected Stakeholders 152
5.3.2 Recommended Areas for Further Studies &n
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