CAPITAL STRUCTURE AND FIRM VALUE: THEORY AND FURTHER EMPIRICAL EVIDENCE FROM NIGERIA

Chinedu B. Ezirim
Ucheoma I. Ezirim
University of Port Harcourt, Nigeria

Austin A. Momodu
Rivers State University of Science and Technology, Nigeria

ABSTRACT

The study empirically extends the investigation of the effects of leverage on the value of firms listed on the Nigeria Stock Exchange. Econometric modeling and estimations were done using the generalized linear model (Quadratic Hill Climbing) technique. Diagnostics test of normality, stationarity and stability were done using Jaque-Bera, augmented Dickey-Fuller, and Ramsey RESET procedures. The results indicate that the variables were normally distributed, stationary and with stable coefficients. Globally, the results show that capital structure is value-relevant contrary to the argument by Modigliani and Miller(1958) and net operating income positions, but in consonance with the traditional and net income theories. Leverage was related negatively and significantly with value, contrary to the traditional and modified Modigliani and Miller arguments. However changes in leverage was related positively and significantly with value, in agreement with the static trade-off and contrary to the pecking order theory. Intertemporal, leverage exerted negative signaling effect on firm value in line with the negative, but contrary to the positive, signaling theory.

Keywords: Capital structure, leverage, firm value, generalized linear model, Quadratic Hill Climbing technique, Nigeria