The impact of profitability on capital structure and speed of adjustment: An empirical examination of selected firms in Nigerian Stock Exchange

Abstract

Abstract:The aim of the study was to investigate the impacts of capital structure on the performance of Nigerian listed non-financial firms and how these firms adjust to the target capital structure. We tested the Trade-off theory and the pecking order theory and the relevance of these theories to Nigerian firms is confirmed. The speed of adjustment to the target capital structure is determined using both pool OLS and GMM to ensure the robustness of the finding. The descriptive statistics show that leverage constitute 63 percent of the capital structure of Nigerian firms, while leverage is dominated with the short term leverage. We observed that profitability and asset structure were negatively related to leverage while the size of the firm and non-debt tax shield were positively related to leverage. The adjustment speed of Nigerian firms is very high 47% that compares well with studies on non-financial firms done in most developed countries.

Determinants of Capital Structure and Speed of Adjustment: Evidence from Iran and Australia

“…Most studies have looked at the speed of adjustment based on the corporate capital structure of developed countries, while the speed of adjustment rate in developing countries has recently attracted the attention of researchers (Supra, 2016).For this purpose, the speed of adjustment of capital structure for the developing country of Iran is compared with the developed country of Australia. Also in order to estimate the speed rate, In addition to the OLS method, the GMM method which is a robust and valid method for heterogeneity of data And endogenous problems has been used (Lema and Negash, 2014;Oino and Ukaegbu, 2015).…”

“…Therefore, when a company deviates from the target leverage, it has four options. If the company is over the leverage, the managers can return to the target leverage by issuing new equity or retiring the debt, and when the company is under the leverage, the managers can repurchase shares or issue new debt to take advantage of the tax shield (Oino and Ukaegbu, 2015). Nerveless, since all these methods are costly, firms adjust the leverage level to the optimal leverage at different speeds due to their different characteristics (Ghose, 2017).…”

“…To solve the first problem, a reasonable estimate of the target leverage is made using the variables affecting capital structure, and the lagged variable , −1 is measured using Ordinary Least Square (OLS). In order to ensure the robustness of the findings, the results are compared with the Generalized Method of Moments (GMM) (Oino and Ukaegbu, 2015). This model is based on the fact that the target leverage of different companies can be changed over time under the influence of the determinants of the capital structure.…”

“…In addition to panel fixed effects, in order to ensure the robustness of the findings, GMM method is used to determine adjustment speed of the Iranian companies and compare the two methods (Oino and Ukaegbu, 2015). Table 13 offers the results of the estimation of the adjustment speed for the two regression models.…”

“…Accordingly, company financing policies are set to achieve target leverage ratio, which is specified through establishing a trade-off between the benefits of debt tax shield and the costs of bankruptcy (Supra et al, 2016). In other words, when the company deviates from the target leverage, it will have four options.When the company is over-leveraged, managers can retire debt or Issue new equity to return to the target leverage ratio; or, when the firm is under-leveraged, managers can repurchase shares or issue new debt to exploit the advantage of tax shield caused by debt increase (Oino and Ukaegbu, 2015). However, the process of capital structure adjustment may create costs for the company, and managers take action to adjust leverage ratio only when the benefits of capital structure adjustment are more than its costs (Fakhrhosseini and Sangdovini, 2016).…”