Debt Financing and Firm Valuation of Quoted Non-Financial Firms in Nigeria Stock Exchange

Published: Sep 5, 2022

Abstract:

Purpose: This study examined the effect of debt financing on the firm valuation of quoted non-financial firms on the Nigerian Stock Exchange (NSE). The study specifically evaluated the effect of short-term debt to equity, long-term debt to equity, and total debt to assets on Tobin’s Q for the period 2011 to 2019.

Methodology: The study adopts the ex post facto research design. The sampling technique utilized in the study was non-probability sampling. The final sample comprised seventy-five firms quoted non-financial firms on the Nigerian Stock Exchange (NSE). The secondary data obtained from MachameRATIOS®were analyzed using panel regression techniques. Unlike prior studies, the study also employs the Arellano Bond Dynamic Panel-data Estimation Model for robustness analysis.

Results: There is a negative effect of short-term debt to equity on Tobin’s Q. The effect of long-term debt to equity and total debt to assets was positive and significant.

Limitations: The main limitation is the unbalanced nature of some sectors due to data unavailability.

Contribution: The study contributes to the literature in the context of developing countries, on the effect of long-term debt on firm valuation; consistent with the trade-off theory of the cost of long-term debt financing as an alternative to internal funding.

Keywords:
1. Debt financing
2. Short-term debt
3. Long-term debt
4. Tobin’s Q
Authors:
1 . Patricia Chinyere Oranefo
2 . Chinedu Egbunike
How to Cite
Oranefo, P., & Egbunike, C. (2022). Debt Financing and Firm Valuation of Quoted Non-Financial Firms in Nigeria Stock Exchange. International Journal of Financial, Accounting, and Management, 4(2), 199–218. https://doi.org/10.35912/ijfam.v4i2.1064

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References

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  2. Abor, J. (2007). Debt policy and performance of SMEs: evidence from Ghanaian and South African firms. Journal of Risk Finance, 8(4), 364-379.
  3. Adeyemi, S. B., & Oboe, C. S. (2011). Perceived relationship between corporate capital structure and firm value in Nigeria. International Journal of Business and Social Science, 2(19), 131-143.
  4. Agrawal, A., & Knoeber, C. R. (1996). Firm performance and mechanism to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31(3), 377-397.
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  6. Akinyomi, O. J. (2013). Effect of capital structure on firms performance: Evidence from Nigerian Manufacturing Company. International Journal of Innovative Research and Studies, 2(9).
  7. Al Hussaini, A. N. (2018). Factors Affecting Debt to Equity Mixture in Kuwait, Bahrain and Oman. International Journal of Asian Social Science, 8(12), 1204-1218.
  8. Al-Najjar, B., & Al-Najjar, D. (2017). The impact of external financing on firm value and a corporate governance index: SME evidence. Journal of Small Business and Enterprise Development, 24(2), 411-423.
  9. Al?Najjar, B., & Taylor, P. (2008). The relationship between capital structure and ownership structure: New evidence from Jordanian panel data. Managerial Finance, 34(12), 919-933. https://doi.org/10.1108/03074350810915851
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  30. Huang, S., & Song, F. (2006). The determinants of capital structure: evidence from China. China Economic Review, 17(1), 14-36
  31. Haniffa, R., & Hudaib, M. (2006). Corporate governance structure and performance of Malaysian listed companies. Journal of Business Finance & Accounting, 33(2), 1034-1062.
  32. Insee (2020). Non-financial companies. Available at: https://www.insee.fr/en/metadonnees/definition/c1218
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  36. Jermias, J. (2008). The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance. British Accounting Review, 40(1), 71-86.
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  38. Jeroh, E., & Okoro, G. E. (2014). Corporate governance and disclosure practices in the Nigerian banking industry. Nigerian Journal of Management Science, 4(2), 138-149.
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  51. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporate finance and the theory of investment. American Economic Review, 48, 261-297.
  52. Morri, G., & Cristanziani, F. (2009). What determines the capital structure of real estate companies? An analysis of the EPRA/NAREIT Europe Index. Journal of Property Investment & Finance, 27(4), 318-372. https://doi.org/10.1108/14635780910972288
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  56. Nimalathasan, B., & Brabete, V. (2010). Capital structure and its impact on profitability: a study of listed manufacturing companies in Sri Lanka. Young Economists Journal, 8 (15), 121-221.
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