ABSTRACT
The study of capital structure attempts to explain the mix of securities and financing sources
used by corporations to finance real investment. Most of the researches are on industrialized
economies and evidence on developing countries like Nigeria remain scanty. This study, which
attempts to fill the void or contribute to filling it, investigates and empirically analyses the
application of the capital structure theory to the Nigerian situation. capital structure models,
such as the pecking order and trade-off theories, were specifically applied using data from annual
financial reports of sixty quoted firms over a ten-year period, 1996 to 2005, as well as the
Nigerian Stock Exchange (NSE) publications. The study utilized correlation and regression
analyses as well as an autoregressive distributive lag (ADL) model to test for capital structure
adjustment and other related issues.
The study showed that market leverage is a decreasing
function of marginal tax rate, growth options, capital market conditions, collateral, profitability
and earnings volatility; and an increasing function of size and profitability attained Statistical
significance with meaningful theoretical explanation. The cross-sectional behaviour of most of
the explanatory variables was unstable over time. Overall, the empirical evidence obtained
confirms the theoretical predictions of the pecking order and trade-off models though more
evidence exists to validate the former theory. Further, we find that the tax benefits of debt are
about 14.6 per cent of firm value. The implications of these results are discussed. In particular,
managers of firms seem to be concerned about the value of tangible assets, firm size and
profitability in their financing decisions. Finally, our results confirmed the targets-adjustment
hypothesis of capital structure: Nigerian quoted firms engage in dynamic rebalancing of capital
structure toward their target debt ratios. The major contribution of this study is the applications
of our theory, a modified version of the standard pecking model. We recommend among others
that profitable firms in greater tax brackets should borrow more to maximize the tax shield
benefit. This thesis therefore sends some signals on the need for both the lending institutions and
the financial system regulators to review the corporate financing operations. it also recommends,
among others that further studies should investigate the issue of adjustment costs on capital
structure
