Moderating Effects of Financial Decisions on Firm Value

Abstract

This study examines the relationship between dividend policy and financial leverage (financial decisions), as well as their interactive effect on firm value. Using 20 out of the 35 companies listed on the manufacturing industrial sector of the Nigerian Stock Exchange (NSE), with financial data between 2010 and 2018, estimation techniques such as Pooled Ordinary Least Square (OLS), Generalised Least Square (GLS), Panel-Corrected Standard Errors (PCSEs) and dynamic panel system-GMM, were used to estimate the relationship between dividend policy and financial leverage. The fixed and random effects panel regressions are used to estimate our equation for the interactive effect of dividend policy and financial leverage on the value of firms.

The results reveal a significant negative relationship between debt ratio and dividend payout. The interaction term between dividend per share and debt-to-assets ratio shows a negative relationship to firm value. A negative coefficient is also reported for the relationship between firm value and the interaction term of dividend payout and debt-to-assets ratio. We conclude that increasing debt (leverage) as a monitoring mechanism to reduce agency costs will hamper the dividend payout policy and erode firm value.

Keywords; Agency problem, dividend policy, financial leverage, firm value

DOI: 10.7176/RJFA/16-2-04

Publication date: February 28^th 2025