Institutional Investors, Board Size and Capital Structure Decisions: Empirical Evidence from Non-Financial Firms in Nigeria

Abstract

This paper explores empirically the contribution of institutional holdings in capital structure decisions using firm level annual data for sample period from 2009-2013 of 19 non-financial firms listed on the Nigeria Stock Exchange. The study also examines the effect of board size on financial mix decisions and controlled for traditional determinants of capital structure which include firm size and profitability. The analysis reveals that board size and the control variables have positive and statistically significant effect on capital structure decisions. We also find that institutional shareholding complement leverage but it is not statistically significant. The results therefore suggest that board size, profitability and firms’ size are important variables to be looked at when determining optimum financing mix. Furthermore, the insignificant contribution of institutional shareholders to achieving optimum level of capital structure may emanate from the fact that the institutional base of the firms in the study are not strong enough to adequately monitor managerial inefficiencies. More so, these institutions may be handpicked and not independent institutions. Therefore, for institutional investors to have considerable effect in capital structure decisions they should be independent.

Keywords: Institutional shareholding, Board Size, Capital Structure, Profitability