Shareholder value diminution through long-term debts: Evidence from the Nigerian oil industry

https://doi.org/10.35912/amor.v6i3.2628
Published: Feb 21, 2025

Abstract:

Purpose: Failure to maintain an optimal balance between the benefits of long-term debts and the risks associated with financial distress often results in the erosion of shareholder value. In view of the above problem, this study examined whether long-term debts affect shareholder value diminution among listed oil and gas firms in Nigeria.

Research Methodology: The ex-post facto research design was deployed on a sample of five firms purposively selected from a population of nine listed oil and gas firms in Nigeria. Secondary data were sourced from the firms’ annual reports between 2014-2023. The hypotheses were tested using panel-estimated generalised least squares.

Results: An increase in long-term debt to asset ratio significantly contributes to shareholder value diminution (? = -42.56871; p-value of 0.0003); an increase in long-term debt to equity ratio significantly contributes to shareholder value diminution (? = -5.441092; p-value of 0.0005).

Limitations: The study sampled only five out of nine listed Nigerian oil and gas firms and relies solely on net assets per share to measure shareholder value, which may not fully capture the industry's broader financial dynamics.

Contribution: In conclusion, the over-reliance on long-term debt financing contributes to heightened financial vulnerability as well as sabotages the aim of maximising shareholders wealth. We recommend that the management of companies in the Nigerian oil and gas industry implement stricter controls on their long-term debt-to-asset ratios by setting a threshold beyond which debt levels should not increase in order to avoid significant shareholder value erosion.

Keywords:
1. Shareholder Value Diminution
2. Long-Term Debts
3. Static Trade-Off Theory
Authors:
1 . Ama Kalu Ikwuo
University of Calabar, Cross River State, Nigeria
2 . Isaiah Michael Nwite
Ebonyi State University, Abakaliki, Ebonyi State, Nigeria
3 . Gilbert Ogechukwu Nworie
Ebonyi State University, Abakaliki, Ebonyi State, Nigeria
4 . Fidelia Nkechi Nworie
Ukoro Odah Statisticals, Amansea, Nigeria
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How to Cite
Ikwuo, A. K., Nwite, I. M., Nworie, G. O., & Nworie, F. N. (2025). Shareholder value diminution through long-term debts: Evidence from the Nigerian oil industry. Annals of Management and Organization Research, 6(3), 271–285. https://doi.org/10.35912/amor.v6i3.2628
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Issue & Section
Vol. 6 No. 3 (2025): February
Articles
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    Ahmad, E. (2023). The Effect of Funding from Short-Term Debt, Long-Term Debt, and Equity On. Interdisciplinary Journal of Educational Practice (IJEP), 10(2), 7-14.

    Ahmad, S. M., Bakar, R., & Islam, M. (2020). The effect of debt financing on firm value: A panel data approach. Albukhary Social Business Journal, 1(2), 33-45.

    Akhtar, M. W., Khan, F. A., Shahid, A., & Ahmad, J. (2016). Effects of Debt on the Value of a Firm. Journal of Accounting & Marketing, 5(4), 1-4.

    Anaike, C., Nworie, G. O., & Ochuka, C. E. (2024). Corporate Citizenship and Wealth Maximisation: A Re-evaluation of Stakeholder Theory Using Evidence from Listed Industrial Goods Firms in Nigeria. Asian Journal of Economics, Business and Accounting, 24(8), 262-273.

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    Apergis, N., & Sorros, J. (2011). Long-Term Debt and the Value of the Firm: Evidence from International Listed Manufacturing Firms. Review of Economics & Finance, 1, 60-72.

    Appiah, K. O., Gyimah, P., & Abdul-Razak, Y. (2020). Financial leverage and corporate performance: does the duration of the debt ratio matters? International Journal of Business and Emerging Markets, 12(1), 31-45.

    Bilal, K., & Tanveer, R. (2023). Optimal Capital Structure and Firm Performance in the Textile Sector of Pakistan. Journal of Policy Options, 6(4), 1-11.

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    Fachrian, Z., & Hidayat, W. W. (2023). The Influence of Liquidity Ratio as Current (CR),(DER) Rasio Leverage and Asset Structure to Return on Investment of Coal Companies. International Journal of Accounting and Management Information Systems, 1(1), 17-31.

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    Hall, J. H. (2024). Corporate shareholder value creation as contributor to economic growth. Studies in Economics and Finance, 41(1), 148-176.

    Ikilidih, J. N., & Dibua, E. C. (2023). LONG TERM DEBT RATIO AND EARNINGS PER SHARE OF LISTED MANUFACTURING FIRMS IN NIGERIA. Scholarly Journal of Management Sciences Research, 2(12), 1-9.

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    Jibrin, A., Abubakar, S. U., & Abubakar, B. (2024). Effect of Long-Term Debt on Financial Performance of Cement Manufacturing Companies: A Review. African Journal of Management and Business Research, 16(1), 69-82.

    Liviani, R., & Rachman, Y. T. (2021). The influence of leverage, sales growth, and dividend policy on company value. International Journal of Financial, Accounting, and Management, 3(2), 165-178.

    Lomwai, S. P., & Ndede, F. W. (2023). Effect of Debt Leverage and Debt-Equity Leverage on Financial Performance of Commercial and Services Companies Listed at the Nairobi Securities Exchange, Kenya. Journal of Finance and Accounting, 3(3), 32-47.

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    Mohammed, A., Taiwo, O., Bappah, S., & Saleh, M. (2024). Effect of Capital Structure on Financial Performance of Listed Oil and Gas Firms in Nigeria. 3, 999-1008.

    Muthoni, K. G., Jagongo, A., & Muniu, J. (2019). Effect of equity financing on shareholder value creation of non-financial firms quoted at the Nairobi Securities Exchange. Journal of Finance & Accounting, 3(5), 32-52.

    Mwiti, M. E., & Gitagia, F. (2023). Long term debts and financial performance of manufacturing firms listed at Nairobi Securities Exchange, Kenya. International Academic Journal of Economics and Finance, 3(10), 267-278.

    Naomi, I. W. (2023). Debt Financing and Financial Performance of Manufacturing Firms in Kenya. African Journal of Commercial Studies. African Journal of Commercial Studies, 3(2), 86-95.

    Nawary, M., & Hussien Seoudy, D. M. K. (2023). Determinants of Shareholders’ Value Creation in the Listed Egyptian Commercial Banks (2012-2021). Journal of Finance and Economics, 11(2), 92-112.

    Nugrahani, P. Y., Soma, A. M., & Sitorus, P. M. (2024). Effect of leverage, firm size, and profitability on systematic risk and its implications on share price. Journal of Multidisciplinary Academic Business Studies, 1(4), 933-951.

    Nworie, G., Obi, G., Anaike, C., & Uchechukwu-Obi, C. (2022). Environmental Responsibility as an Upshot of Firm Leverage in Industrial Goods Sector of the Nigerian Exchange Group. International Journal of Advances in Engineering and Management, 4(12), 724-732.

    Nworie, G. O., & Mba, C. J. (2022). Modelling financial performance of food and beverages companies listed on Nigerian exchange group: the firm characteristics effect. Journal of Global Accounting, 8(3), 37-52.

    Nworie, G. O., & Oguejiofor, B. C. (2023). Management Information System and Performance of Cement Firms in Southeast Nigeria. International Journal of Accounting and Management Information Systems, 1(1), 1-15.

    Obi, G. U., & Nworie, G. O. (2024). Stock Market Performance of Nigerian Consumer Goods Firms: Does Leverage Level Matter? WORLD JOURNAL OF FINANCE AND INVESTMENT RESEARCH, 8(3), 20-24. doi:10.56201/wjfir.v8.no3.2024.pg20.34

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    Omabu, S. E., Okoye, P. V., & Amahalu, N. N. (2021). Financial leverage and shareholders wealth creation of quoted industrial goods firms in Nigeria. International Journal of Trend in Scientific Research and Development (IJTSRD), 5(6), 673-681.

    Omokore, D. E., Njogo, B. O., Omankhanlen, A. E., Islaka, M., & Akinjare, V. A. (2024). Impact of Capital Structure on Financial Performance of Firms in the Nigerian Healthcare Sector. Journal of Comprehensive Business Administration Research, 1(2), 105-112.

    Oranefo, P. C., & Egbunike, C. F. (2023). Accounts Payable Turnover and Firm Performance of Quoted Manufacturing Firms in Nigeria. International Journal of Accounting and Management Information Systems, 1(1), 45-65.

    Pyoko, O. M. (2024). Effect of Firm Size and Profitability on Long Term Debt of Firms Listed at the Nairobi Securities Exchange, Kenya. Asian Journal of Probability and Statistics, 26(2), 84-90.

    Rohwer, D. (2022). Designing Ex Post Facto and Experimental Studies Inquiry in Music Education (pp. 230-252): Routledge.

    Sukma, R. P., Nurtina, A. R., & Nainggolan, B. M. (2022). Effect of debt ratio, long-term debt to equity, and firm size on profitability. Journal of Management and Leadership, 5(1), 27-37.

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  2. Adibeli, P. C., & Amahalu, N. N. (2023). Debt Financing and Shareholders Wealth Creation of Quoted Manufacturing Firms in Nigeria. Journal of Global Accounting, 9(2), 70–112-170–112.
  3. Ahmad, E. (2023). The Effect of Funding from Short-Term Debt, Long-Term Debt, and Equity On. Interdisciplinary Journal of Educational Practice (IJEP), 10(2), 7-14.
  4. Ahmad, S. M., Bakar, R., & Islam, M. (2020). The effect of debt financing on firm value: A panel data approach. Albukhary Social Business Journal, 1(2), 33-45.
  5. Akhtar, M. W., Khan, F. A., Shahid, A., & Ahmad, J. (2016). Effects of Debt on the Value of a Firm. Journal of Accounting & Marketing, 5(4), 1-4.
  6. Anaike, C., Nworie, G. O., & Ochuka, C. E. (2024). Corporate Citizenship and Wealth Maximisation: A Re-evaluation of Stakeholder Theory Using Evidence from Listed Industrial Goods Firms in Nigeria. Asian Journal of Economics, Business and Accounting, 24(8), 262-273.
  7. Anozie, O. R., Muritala, T. A., Ininm, V. E., & Yisau, N. S. (2023). Impact of capital structure on financial performance of oil and gas firms in Nigeria. Future Business Journal, 9(1), 11.
  8. Apergis, N., & Sorros, J. (2011). Long-Term Debt and the Value of the Firm: Evidence from International Listed Manufacturing Firms. Review of Economics & Finance, 1, 60-72.
  9. Appiah, K. O., Gyimah, P., & Abdul-Razak, Y. (2020). Financial leverage and corporate performance: does the duration of the debt ratio matters? International Journal of Business and Emerging Markets, 12(1), 31-45.
  10. Bilal, K., & Tanveer, R. (2023). Optimal Capital Structure and Firm Performance in the Textile Sector of Pakistan. Journal of Policy Options, 6(4), 1-11.
  11. Buertey, S. (2023). Drivers of shareholder value: evidence from an emerging market. Afro-Asian Journal of Finance and Accounting, 13(3), 399-414.
  12. Bui, T. N., Nguyen, X. H., & Pham, K. T. (2023). The effect of capital structure on firm value: A study of companies listed on the Vietnamese stock market. International Journal of Financial Studies, 11(3), 100.
  13. Chandra, S., & Juliawati, C. (2020). Effects of long term debt to total assets, short term debt to total assets, total asset turnover, and inventory turnover on profitability of manufacturing companies in consumer goods subsector listed on IDX. Journal of Applied Business and Technology, 1(3), 212-222.
  14. D'Mello, R., Gruskin, M., & Kulchania, M. (2018). Shareholders valuation of long-term debt and decline in firms' leverage ratio. Journal of Corporate Finance, 48, 352-374.
  15. Egiyi, M. A., & Okafor, V. I. (2022). An empirical examination of the effect of shareholder value on firm performance in Nigeria. Global Journal of Auditing and Finance, 4(1), 23-33.
  16. Endri, E., Ridho, A. M., Marlapa, E., & Susanto, H. (2021). Capital structure and profitability: Evidence from mining companies in Indonesia. Montenegrin Journal of Economics, 17(4), 135-146.
  17. Endri, E., Supeni, M., Budiasih, Y., Siahaan, M., Razak, A., & Sudjono, S. (2021). Oil price and leverage for mining sector companies in Indonesia. International Journal of Energy Economics and Policy, 11(4), 24-30.
  18. Fachrian, Z., & Hidayat, W. W. (2023). The Influence of Liquidity Ratio as Current (CR),(DER) Rasio Leverage and Asset Structure to Return on Investment of Coal Companies. International Journal of Accounting and Management Information Systems, 1(1), 17-31.
  19. Farah, I., Amin, C., & Pramudianto, P. (2021). The Effect of Debt To Asset Ratio, Long Term Debt To Equity Ratio and Time Interest Earned Ratio on Profitability. Bina Bangsa International Journal of Business and Management, 1(1), 68-78.
  20. Fijabi, L. K., Ajao, O. S., & Ajibade, A. T. P. (2022). A comparative study of financial management practices on the performance of quoted manufacturing and oil and gas firms in Nigeria. Caleb International Journal of Development Studies, 5.
  21. Genç, E. (2018). Testing the pecking order theory and static trade-off theory of capital structure: Evidence from French listed firms. University of Twente.
  22. Gupta, A., & Chandra, P. (2024). TO STUDY CAPITAL STRUCTURE AND ITS RELATIONSHIP WITH FINANCIAL PERFORMANCE. doi:10.1729/Journal.38480
  23. Hall, J. H. (2024). Corporate shareholder value creation as contributor to economic growth. Studies in Economics and Finance, 41(1), 148-176.
  24. Ikilidih, J. N., & Dibua, E. C. (2023). LONG TERM DEBT RATIO AND EARNINGS PER SHARE OF LISTED MANUFACTURING FIRMS IN NIGERIA. Scholarly Journal of Management Sciences Research, 2(12), 1-9.
  25. Ikwuo, A. K., Ikwor, U. K., Abagha, J. U., Esther, N.-C. U., & Nworie, G. O. (2024). Effect of Public Debt on Economic Development in Nigeria (2000–2023). Asian Journal of Economics, Business and Accounting, 24(12). doi:https://doi.org/10.9734/ajeba/2024/v24i121605
  26. Jibrin, A., Abubakar, S. U., & Abubakar, B. (2024). Effect of Long-Term Debt on Financial Performance of Cement Manufacturing Companies: A Review. African Journal of Management and Business Research, 16(1), 69-82.
  27. Liviani, R., & Rachman, Y. T. (2021). The influence of leverage, sales growth, and dividend policy on company value. International Journal of Financial, Accounting, and Management, 3(2), 165-178.
  28. Lomwai, S. P., & Ndede, F. W. (2023). Effect of Debt Leverage and Debt-Equity Leverage on Financial Performance of Commercial and Services Companies Listed at the Nairobi Securities Exchange, Kenya. Journal of Finance and Accounting, 3(3), 32-47.
  29. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48(3), 261-297.
  30. Mohammed, A., Taiwo, O., Bappah, S., & Saleh, M. (2024). Effect of Capital Structure on Financial Performance of Listed Oil and Gas Firms in Nigeria. 3, 999-1008.
  31. Muthoni, K. G., Jagongo, A., & Muniu, J. (2019). Effect of equity financing on shareholder value creation of non-financial firms quoted at the Nairobi Securities Exchange. Journal of Finance & Accounting, 3(5), 32-52.
  32. Mwiti, M. E., & Gitagia, F. (2023). Long term debts and financial performance of manufacturing firms listed at Nairobi Securities Exchange, Kenya. International Academic Journal of Economics and Finance, 3(10), 267-278.
  33. Naomi, I. W. (2023). Debt Financing and Financial Performance of Manufacturing Firms in Kenya. African Journal of Commercial Studies. African Journal of Commercial Studies, 3(2), 86-95.
  34. Nawary, M., & Hussien Seoudy, D. M. K. (2023). Determinants of Shareholders’ Value Creation in the Listed Egyptian Commercial Banks (2012-2021). Journal of Finance and Economics, 11(2), 92-112.
  35. Nugrahani, P. Y., Soma, A. M., & Sitorus, P. M. (2024). Effect of leverage, firm size, and profitability on systematic risk and its implications on share price. Journal of Multidisciplinary Academic Business Studies, 1(4), 933-951.
  36. Nworie, G., Obi, G., Anaike, C., & Uchechukwu-Obi, C. (2022). Environmental Responsibility as an Upshot of Firm Leverage in Industrial Goods Sector of the Nigerian Exchange Group. International Journal of Advances in Engineering and Management, 4(12), 724-732.
  37. Nworie, G. O., & Mba, C. J. (2022). Modelling financial performance of food and beverages companies listed on Nigerian exchange group: the firm characteristics effect. Journal of Global Accounting, 8(3), 37-52.
  38. Nworie, G. O., & Oguejiofor, B. C. (2023). Management Information System and Performance of Cement Firms in Southeast Nigeria. International Journal of Accounting and Management Information Systems, 1(1), 1-15.
  39. Obi, G. U., & Nworie, G. O. (2024). Stock Market Performance of Nigerian Consumer Goods Firms: Does Leverage Level Matter? WORLD JOURNAL OF FINANCE AND INVESTMENT RESEARCH, 8(3), 20-24. doi:10.56201/wjfir.v8.no3.2024.pg20.34
  40. Oko, S. U., & Elemi, N. E. (2023). THE EFFECT OF FINANCIAL LEVERAGE ON THE FINANCIAL PERFORMANCE OF QUOTED INDUSTRIAL GOODS FIRMS IN NIGERIA. GSJ, 11(7).
  41. Olakada, N. M., Bakare, A. A., Taiwo, M. A., Ibrahim, U. A., & Abubakar, H. L. (2024). Joint venture, technology transfer and the performance of nigerian oil and gas industry. International Journal of Professional Business Review, 9(3), e04252-e04252.
  42. Omabu, S. E., Okoye, P. V., & Amahalu, N. N. (2021). Financial leverage and shareholders wealth creation of quoted industrial goods firms in Nigeria. International Journal of Trend in Scientific Research and Development (IJTSRD), 5(6), 673-681.
  43. Omokore, D. E., Njogo, B. O., Omankhanlen, A. E., Islaka, M., & Akinjare, V. A. (2024). Impact of Capital Structure on Financial Performance of Firms in the Nigerian Healthcare Sector. Journal of Comprehensive Business Administration Research, 1(2), 105-112.
  44. Oranefo, P. C., & Egbunike, C. F. (2023). Accounts Payable Turnover and Firm Performance of Quoted Manufacturing Firms in Nigeria. International Journal of Accounting and Management Information Systems, 1(1), 45-65.
  45. Pyoko, O. M. (2024). Effect of Firm Size and Profitability on Long Term Debt of Firms Listed at the Nairobi Securities Exchange, Kenya. Asian Journal of Probability and Statistics, 26(2), 84-90.
  46. Rohwer, D. (2022). Designing Ex Post Facto and Experimental Studies Inquiry in Music Education (pp. 230-252): Routledge.
  47. Sukma, R. P., Nurtina, A. R., & Nainggolan, B. M. (2022). Effect of debt ratio, long-term debt to equity, and firm size on profitability. Journal of Management and Leadership, 5(1), 27-37.
  48. Udo, E. S., Jack, A. E., Okoh, J. I., Agbadua, O. B., Eke, R., & Onyemere, I. (2024). Intricate Capital Structure Influence on Firm Performance: An Empirical Analysis of Oil and Gas Firms in Nigeria. African Journal of Business & Economic Research, 19(3).
  49. Ugwuene, R., Okwo, M., & Ubesie, M. (2022). Effect of Corporate Financing on Shareholder’s Value Maximization of Nigerian Pharmaceutical Sector.