Corporate Capital Structure and Firm’s Market Value in Nigeria

Abstract

The financing decision preference of firms is perhaps the most researched topic area in finance in the past decades following the seminal article of Modigliani and Miller (1958) which raised the issue of relationship between a firm’s choice of finance and its value. After the Modigliani-Miller (1958 and 1963) paradigms on firms’ capital structure and their market values, there have been considerable debates, both theoretically and in empirical researches on the nature of relationship that exists between a firm’s choice of capital structure and its market value. Most especially, major debates have centred on whether there is an optimal capital structure for an individual firm or whether the proportion of debt usage is relevant to the individual firm's value.  This study therefore seeks to identify and appraise the impact, capital mix, role of debt capital and the factors that influence a firm’s choice of capital and the overall effect of firm’s market value in Nigeria.

In the course of this study; both primary and secondary sources of data were relied upon. The primary data were obtained through the use of a well structured questionnaire, while the secondary data were obtained from the fact book and periodic publications of the Nigerian Stock Exchange, as well as the annual financial statements of the sampled firms. The result indicated that the market value of a firm is positively significantly influenced by its choice of capital structure (financial leverage). Consequently the theory of a firm’s optimal capital structure is justified on the ground that it has an empirical significant positive impact on the firm’s market value. The study recommends that Quoted firms in Nigeria are encouraged to make maximizing of their market values the major focus when deciding their choice of capital structure and firms in Nigeria should strive to optimize their capital structure by an appropriate mix of debt-equity capital; for an optimal capital structure is the debt-equity mix that best maximize firms’ market values.

Keywords: Capital structure, Market Value, Financing decision, Quoted firms, Nigerian Stock Exchange

Foreign fund, Challenge