Determinants of Leverage in Listed Service Companies in Nigeria

Determinants of Leverage in Listed Service Companies in Nigeria

Determinants of Leverage in Listed Service Companies in Nigeria

 

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Chapter One of Determinants of Leverage in Listed Service Companies in Nigeria

INTRODUCTION

Background To The Study

The leverage or Capital structure of a firm could be a combination of both debt and equity or by debt, or by equity. Consequently the capital structure of the firm has implications for the shareholders earnings and risk, which also affect the cost of capital and the market value of the firm. Capital structure centers on the mix of debt and equity in financing the assets used by firms. 
Capital structure influences the financial performance and efficiency of the firm. Ghosh, (2008); Margaritis and Psillaki, (2007). A firm could increase or decrease its leverage by either issuing additional debt to buy back stock or issuing stock to pay debt. The essence of the effective management of the capital structure is to determine appropriate mix of the financial sources used by the firm so as to maximize the shareholders’ wealth and minimize the firm’s cost of capital. 
The proper mix of funds sources is referred to as the capital structure. Then how should a firm choose its debt to equity ratio? And, what is the optimal capital structure for a firm? Whether or not such an optimal capital structure exists? What are the potential determinants of such optimal capital structure is an issue in corporate finance Myers, (1984). 
The determinants of capital structure among listed firms in Nigeria are tangibility, firm size, profitability, firm growth and firm’s age. The research seek to investigate the Determinants of leverage in listed service companies in Nigeria (using 8 determinants, ten Banks, for 6 years – that translates to 60 samples).

Statement of the Problem 

Capital structure management involves risk if the determinant factors are not appropriately considered. Leverage could produce profit, when the returns from the asset more than offset the costs of borrowing. It may also reflect losses. A firm with huge debt might face bankruptcy or default during a business downturn, while a lessleveraged corporation might survive. A loss in value of collateral assets could also pose as risk to capital structure management. Brokers may require the addition of funds when the values of securities hold declines. 
Banks may fail to renew mortgages when the value of real estate declines below the debt’s principal. Even if cash flows and profits are sufficient to maintain the ongoing borrowing costs, loans may be called. The determinants of capital structure among listed firms in Nigeria are tangibility, firm size, profitability, firm growth and firm’s age which if not appropriate considered could plunge the firm into greater crisis. The problem of the research centers on the appraisal of the Determinants of leverage in listed service companies in Nigeria (use 8 determinants, ten Banks, for 6 years – that translates to 60 samples).

Objectives of the Study 

1.   To determine the nature of leverage management. 
2.   To examine the determinants of leverage in listed service companies in Nigeria. 

Research Questions

1.   What is the nature of leverage management in Nigeria?
2.   What are the determinants of leverage in listed service companies in Nigeria?

Read Also:  The Effect of Value Added Tax on Revenue Generation of Government

Research Hypothesis 

Ho: There are no effective determinants of leverage in listed service companies in Nigeria. 
Hi:  There are effective determinants of leverage in listed service companies in Nigeria.

Significance of the Study 

The study elucidates on the Determinants of leverage in listed service companies in Nigeria. The Capital structure of a firm could be a combination of both debt and equity or by debt, or by equity. Consequently the capital structure of the firm has implications for the shareholders earnings and risk, which also affect the cost of capital and the market value of the firm. Capital structure centers on the mix of debt and equity in financing the assets used by firms. Capital structure influences the financial performance and efficiency of the firm. Ghosh, (2008); Margaritis and Psillaki, (2007).

Scope of the Study 

The study focuses on the appraisal of the determinants of leverage in listed service companies in Nigeria.
1.8 Limitations of the Study
The study was confronted by some constraints including logistics and geographical factors.

Definition of Terms 

LEVERAGE DEFINED 
The leverage or Capital structure of a firm could be a combination of both debt and equity or by debt, or by equity. Consequently the capital structure of the firm has implications for the shareholders earnings and risk, which also affect the cost of capital and the market value of the firm. Capital structure centers on the mix of debt and equity in financing the assets used by firms. Capital structure influences the financial performance and efficiency of the firm. Ghosh, (2008); Margaritis and Psillaki, (2007). A firm could increase or decrease its leverage by either issuing additional debt to buy back stock or issuing stock to pay debt. The essence of the effective management of the capital structure is to determine appropriate mix of the financial sources used by the firm so as to maximize the shareholders’ wealth and minimize the firm’s cost of capital. 

REFERENCES 

Brigham, Eugene F., Fundamentals of Financial Management (1995). 
Mock, E. J., R. E. Schultz, R. G. Schultz, and D. H. Shuckett, Basic Financial Management (1968). 
Grunewald, Adolph E. and Erwin E. Nemmers, Basic Managerial Finance (1970). 
Ghosh, Dilip K. and Robert G. Sherman (June 1993). “Leverage, Resource Allocation and Growth”. Journal of Business Finance & Accounting. pp. 575–582. CS1 maint: Uses authors parameter (link) 
Lang, Larry, Eli Ofek, and Rene M. Stulz (January 1996). “Leverage, Investment, and Firm Growth”. Journal of Financial Economics. pp. 3–29. CS1 maint: Uses authors parameter.
Bodie, Zvi, Alex Kane and Alan J. Marcus, Investments, McGraw-Hill/Irwin (June 18, 2008) 
Chew, Lillian (July 1996). Managing Derivative Risks: The Use and Abuse of Leverage. John Wiley & Sons. 
Van Horne (1971). Financial Management and Policy. 
Weston, J. Fred and Eugene F. Brigham, Managerial Finance (1969). 
Weston, J. Fred and Eugene F. Brigham, Managerial.

 

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