School of Management

Student to Complete

YUSUF BABATUNDE ADENEYE

139053565

MSc Finance

Research Methods

Registration Expiry Date: 31 July 2016

Word Count: 1,736

Page 1 of 12
 School of Management

The Proposal Template

Specialism
 MSc Finance

Ethical Approval reference number (you will receive this once your Supervisor approves
your ethical approval request)
 3295-yba2-schoolofmanagement

Dissertation Supervisor

Professor Chin-Bun Tse

Title
Cross Sectional Analysis of Determinants of Capital Structure in Quoted
Companies in Nigeria

Introduction
A large amount of literature have examined the nature of capital
structure, capital structure differences, optimal capital structure and
the determinants of capital structure at firms, industry, and country
level using OLS regression, pooled data, fixed effects and random
effects methodology (Alhassan, Addisson & Asamoah, 2015; Alkhazaleh &
Almsafir, 2015; Basu, 2015; Bin, Chen & Chan, 2015; Burgstaller &
Wagner, 2015; Dasilas & Papasyriopoulos, 2015; Faccio & Xu, 2015; Hearn
& Piesse, 2015; Monteforte & Staglianò, 2015; Ramadan & Ramadan, 2015).
Some of these recent researchers have suggested cross-sectional studies
that would involve large publicly available data set.
The aim of the study is to evaluate the determinants of capital
structure among different sectors in Nigeria. The study aims to proffer
solution to the following research questions:
1. What is the relationship between industry factor and leverage
among Nigeria firms?

Page 2 of 12
 School of Management

2. What is the relationship between leverage and tangibility (asset

structure) of quoted firms in Nigeria?
3. To what extent does profitability affect leverage of firms in
Nigeria?
4. What is the relationship between borrowing capacity and capital
structure among Nigeria firms?
5. What is the relationship between leverage and non-debt tax
shields?
6. To what extent does firm size determine capital structure in
Nigeria firms?
The motivation of these questions is that over 80% of today’s firms now
see that it is safer financing capital investments by debts and those
debts can be good mechanism in reducing the agency costs so long as
financial risks are reduced to the level that shareholders’ wealth
maximization is not jeopardized.

Relation to previous research (Theoretical Framework)

Most empirical literatures have established a positive, negative or no
relationship between determinants of capital structure and leverage
(Tsuruta, 2015; Lu-Andrews & Yu-Thompson, 2015; Vallandro, Zani & da-
Silva, 2015; Jones, 2015; Kuo, Wang & Lin, 2015; Lee, 2015 Sharma &
Paul, 2015). Theories have also suggested either negative or positive
implications on companies’ capital structure. Koksal and Orman (2015)
noted that the pecking order theory of capital structure will help
describe the capital structure of small firms in a relatively unstable
environment while the trade-off theory will help describe the capital
structure efficiently in large firms in a stable environment.
Contrarily, Tse and Rodgers (2014) found that the two theories do not
explain the capital structure in China. Tse and Rodgers (2014) noted
that the cultural and business environment of China may not give support
to the pecking order and trade-off theories. While Uyar and Guzelyurt
(2015) found support for pecking order among SMEs in Turkish economy,
the capital structure of firms found no support for the trade-off

Page 3 of 12
 School of Management

theory. Rarely, the Malaysian property companies give support for the
Modigliani and Miller theory (Abdul-Hadi, Yusoff & Yap, 2015). According
to Koseoglu (2015), the leverage of 470 firms has a negative effect on
excess stock returns in Istanbul Exchange. Contrarily, Engel, Braun and
Achleitner (2015) found positive relationship between debts level and
equity return however as the debts level increased heavily equal to 90%,
debts level seemed to establish no relationship with risk-adjusted
equity return. This connotes that when debt level is small, it
positively affects returns, when it is medium and growing, it negatively
affect returns and obviously establish no relationship with returns when
its level is large. Bhayani (2015) in his study of Indian cement
industry from period 2000-01 to 2007-08, found that capital structure
does not correlate with the cost of capital and this has no impact for
the market value of firms’ shares. Moreover, existing evidence have also
studied the determinants of capital structure. Hossain and Hossain
(2015) found that tangibility and liquidity have positive relationship
with long term debt in Dhaka stock exchange. Using a panel data analysis
of 74 manufacturing firms between period 2002-2011, the authors noted
that both trade-off theory and pecking order theories are dominating
theories in Bangladesh. Tse and Rodgers (2014) examine borrowing
capacity as determinant of capital structure. Using a pooled regression
analysis on data from manufacturing and non-manufacturing firms in China
revealed that despite that capital structure is different across
industries; borrowing capacity is a determinant of industries’ capital
structure. Ramadan (2015) pointed out that firms’ size exerts a direct
relationship on capital structure. Using a data set of 2000-2014 from
the Jordanian industrial firms, his findings found support to the trade-
off theory. Ramadan (2015) noted that large size firms prefer to finance
firms using debts while small-sized firms will have to extend their
financing to external equity. Yazdanfar and Öhman (2015) highlighted
negative relationship between profitability and long-term debts using
15,897 Swedish SMEs for period 2009-2014. The implication of their
study was the use of three-stage least square (3SLS) given that debts
Page 4 of 12
 School of Management

was divided into trade credit, short-term debts and long-term debts. The
findings of Yazdanfar and Öhman (2015) also corroborate the findings of
Youssef and El-ghonamie (2015) in Egypt. Kramer (2015) found positive
relationship between corporate tax rate and debt to assets ratio using
fixed effect estimation on European data. Limitation of some of these
studies is also the inability to test for appropriate model (i.e. OLS
regression model, panel data model, fixed effect model and random effect
model) to be able to evaluate whether unique time-invariant
characteristics of firms may affect the outcome variable (capital
structure) or not.

Proposed methods
The sample data of the study would consist of 25 industries in Nigeria
and over 500 firms for periods 1996 to 2014 (15years). In all, it may be
concluded that the proposed number of observations for the study is
7500. This is a large size and a distinct originality of this study. All
firms that would be included will be quoted or listed firms within the
period under study.
Empirical model based on Yusuf, Al-Attar and Al-Shattarat (2015). With
their model, I can examine and model the determinants of capital
structure across industries and among quoted companies in Nigeria.
Yusuf, et al. (2015) model takes the following form:

(1)

(2)

Random Effect Model) (3)

Where I is No. of observation, t is the number of explanatory

variable, β0 is constant, βi are regression coefficients, Xi,t are
variables of firm i at time t. Di,t represent the long term debt to
total asset ratio.

Page 5 of 12
 School of Management

LTDi,t = β0 + β1TANGi,t + β2SIZEi,t + β3BORRCi,t + β4NDTS i,t + β5PROFi,t +

β6INDFi,t + β7PROFi,t-1 + εi,t

This model was modified to accommodate or control for change in

profitability (PROFt-1).
Where LTD = Long term liabilities
TANG = Tangibility
SIZE = Firm size
BORRC = Borrowing capacity
NDTS = Non-tax debts shields
PROF = Profitability
INDF = Industry factor

Panel data analysis would be done on data for period 1996-2010 using
EViews 7.0 software package. Firstly, Unit root test would be conducted
to determine the stationary of the data. Hausman (H) test would also be
conducted to determine the best model for the study whether the null
hypothesis would be supported that random effect exists or alternative
that fixed effect exists. Variables not significant in the model would
be eliminated from the model and the model would be done again.
Correlation analysis would also be conducted to know the degree of the
relationship between tangibility (asset structure), firms’ size,
borrowing capacity, non-debts tax shields, profitability, industry
factor and capital structure.

The determinants of capital structure used in this model were taken from different literature

as noted below:
Theoretical
Implications/Predictions
Size (SIZE) Koksal and Orman (2015), Trade-off theory (+)
Nejad and Wasiuzzaman Pecking order theory (-)
(2015) Tchuigoua (2015)
Profitability Nejad and Wasiuzzaman Trade-off theory (+)
(2015) Tchuigoua (2015) Pecking order theory (-)
Tangibility Yusuf, et al. (2015) Trade-off theory (+)
Page 6 of 12
 School of Management

(TANG) Pecking order theory (-)

Non-debt tax Nejad and Wasiuzzaman Static Trade-off theory
shields (2015) Hossain and Hossain (+)
(2015) Yang, Hassan, Al- Pecking order theory (-)
Baity and Zou (2015)
Borrowing Tse and Rodgers (2014) Trade-off theory (+)
capacity Pecking order theory (-)
(BORRC)
Industry factor Yusuf, et al. (2015) Trade-off theory (+)
Oztekin (2015) Pecking order theory (-)

Operationalization of Variables
Definition
Leverage/Capital Long term debts divided Yusuf, et al.
structure total assets (2015)
Firm size Logarithm of Total sales Koksal and Orman
(2015)
Profitability Operating Income divided by Zerriaa and
total assets Noubbigh (2015)
Tangibility net fixed assets to total Tchuigoua (2015)
assets
Borrowing capacity Total fixed assets divided Tse and Rodgers
by total assets (2014)
Industry factor Mean average of leverage Yusuf, et al.
(2015)

Reflections
The practical obstacle may be as a result of getting much literature on
one or two of the independent variables. The ability to review related
literature may also pose some challenges such as proof reading and
alignment of thoughts and ideas of both the authors and the researcher
himself. Empirical obstacles might also be how to integrate balance
arguments in a situation where there is high number of literatures
supporting both positive and negative relationships between variables.
The ability to identify those attributes or factors that may have
resulted in either positive or negative relationship between two
variables is a question of and demonstration of wide reading and
adequate knowledge in capital structure. The integration of Modigliani
and Miller theory of capital structure to explain the case of Nigeria
capital structure may be difficult when compared to other theories that
Page 7 of 12
 School of Management

can easily be explain in relation to the determinants of capital

structure. The ethics in the study is to cite and reference articles
used in the study properly according to the Harvard APA style of
referencing.
My belief is that this study will assist in policy making on financial
strategy by financial analysts on ability to identify individual firm’s
characteristics in the determination of their capital structure. This is
a way in which agency problem may be reduced and give limelight as to
how shareholders’ returns are not jeopardized with high financial risk

of issuance of more debts.

Timetable
 Literature review & theory (chapter 2) 1 Nov.–1 Dec. 2015
 Submission of chapter 2 to supervisor 2 Dec.2015
 Data & Methods (chapter 3) 1 Dec.–7 Dec. 2015
 Collation of data & analysis 7 Dec.–31 Dec. 2015
 Analysis & Results (chapter 4) 1 Jan.–31 Jan. 2016
 Submission of chapter 4 to supervisor 1 Feb. 2016
 Discussions & conclusions (chapter 5) 1 Feb.–14 Feb. 2016
 Introduction (Chapter 1) 15 Feb.–22 Feb.2016

 Proof reading 22 Feb.–28 Feb. 2016

References
Abdul-Hadi, A. R., Yusoff, H., & Yap, E.T.H. (2015). Capital structure
of property companies: Evidence from Bursa Malaysia. International
Journal of Economics and Finance, 7(8), 12-19.
Alhassan, A. L., Addisson, G. K., & Asamoah, M. E. (2015). Market
structure, efficiency and profitability of insurance companies in
Ghana. International Journal of Emerging Markets, 10(4), 648-669.

Page 8 of 12
 School of Management

Alkhazaleh, A. M., & Almsafir, M. K. (2015). Does asymmetry of

information drive banks’ capital structure? Empirical evidence from
Jordan. International Journal of Economics and Finance, 7(3), 86-
97.
Basu, K. (2015). Market imperfections and optimal capital structure:
Evidence from Indian panel data. Global Business Review, 16(1), 61–
83. DOI: 10.1177/0972150914553509.
Bhayani, S. J. (2015). Impact of financial leverage on cost of capital
and valuation of firm: A study of Indian cement industry. Paradigm,
XIII (2), 43-49.
Bin, L., Chen, D. H., & Chan, K. Y. (2015). Chinese corporate
profitability performance following the Splitshare structure
reform. Journal of Finance and Accountancy, 19, 1-12.
Burgstaller, J., & Wagner, E. (2015). How do family ownership and
founder management affect capital structure decisions and
adjustment of SMEs? The Journal of Risk Finance, 16(1), 73-101.
Dasilas, A., & Papasyriopoulos, N. (2015). Corporate governance, credit
ratings and the capital structure of Greek SME and large listed
firms. Small Bus Econ, 45, 215–244. DOI 10.1007/s11187-015-9648-y.
Engel, N., Braun, R., & Achleitner, A. (2015). Leverage and the
performance of buyouts (How) does the use of debt Impact equity
returns? Z Betriebswirtsch, 82, 451–490.
Faccio, M., & Xu, J. (2015). Taxes and capital structure. Journal of
Financial and Quantitative Analysis, 50(3), 277–300.
doi:10.1017/S0022109015000174.
Hearn, B., & Piesse, J. (2015). The impact of firm size and liquidity
on the cost of external finance in Africa. South African Journal of
Economics, 83(1), 1-22. doi: 10.1111/saje.12062.
Hossain, I., & Hossain, A. (2015). Determinants of capital structure and
testing of theories: A study on the listed manufacturing companies
in Bangladesh. International Journal of Economics and Finance,
7(4), 176-190.

Page 9 of 12
 School of Management

Jones, J. B. (2015). The dynamic effects of firm-level borrowing

constraints. Journal of Money, Credit and Banking, 35(5), 743-762.
Koksal, ., & Orman, C. (2015). Determinants of capital structure:
Evidence from a major developing economy. Small Bus Econ, 44:255–
282. DOI 10.1007/s11187-014-9597-x
Koseoglu, B. (2015). Cross-sectional variation in stock returns due to
leverage in exchange Istanbul. International Business Research,
7(1), 34-41.
Kramer, R. (2015). Taxation and capital structure choice: The role of
ownership. Scandinavian Journal of Economics, 117(3), 957–982. DOI:
10.1111/sjoe.12107
Kuo, H. C., & Wang, L. H. (2015). CEO constellation, capital structure,
and financial performance. International Journal of Financial
Research, 6(4), 76-89.
Kuo, H. C., Wang, L. H., & Lin, D. (2015). CEO traits, corporate
performance, and financial leverage. International Journal of
Economics and Finance, 7(1), 68-86.
Lee, S. W. (2015). Ownership structure and capital structure decision.
Modern Applied Science, 9(4), 264-269.
Lu-Andrews, R., & Yu-Thompson, Y. (2015). CEO inside debt, asset
tangibility, and investment. International Journal of Managerial
Finance, 11(4), 451-479.
Majumdar, R. (2012). On the determinants and role of secured and
unsecured borrowing: Evidence from the Indian corporate sector.
Decision, 39(1), 40-54.
Menichini, A. (2015). On the determinants of firm leverage: Evidence
from a structural estimation. International Journal of Managerial
Finance, 11(2), 179–197.
Monteforte, D., & Staglianò, R. (2015). Firm complexity and capital
structure: Evidence from Italian diversified firms. Managerial and
Decision Economics, 36, 205–220.

Page 10 of 12
 School of Management

Nejad, N. R., & Wasiuzzaman, S. (2015). Multilevel determinants of

capital structure: Evidence from Malaysia. Global Business Review,
16(2) 199–212. DOI: 10.1177/0972150914564274.
Oztekin, O. (2015). Capital structure decisions around the world: Which
Factors are reliably important? Journal of Financial and
Quantitative Analysis, 50(3), 301–323.
doi:10.1017/S0022109014000660.
Ramadan, I. Z. (2015). An empirical investigation of the trade-off
theory: Evidence from Jordan. International Business Research,
8(4), 19-24.
Ramadan, Z. S., & Ramadan, I. Z. (2015). Capital structure and firm’s
performance of Jordanian manufacturing sector. International
Journal of Economics and Finance, 7(6), 279-284.
Sharma, P., & Paul, S. (2015). Does liquidity determine capital
structure? Evidence from India. Global Business Review, 16(1), 84–
95. DOI: 10.1177/0972150914553510.
Tchuigoua, H. T. (2015). Capital structure of microfinance institutions.
J Financ Serv Res, 47, 313-340. DOI 10.1007/s10693-013-0190-2.
Tse, C., & Rodgers, T. (2014). The capital structure of Chinese listed
firms: is manufacturing industry special? Managerial Finance,
40(5), 469-486.
Tsuruta, D. (2015). Leverage and firm performance of small businesses:
Evidence from Japan. Small Bus Econ, 44, 385–410.
Uddin, N. (2015). Determinants of corporate capital structure: A
theoretical integration and some empirical evidences. International
Journal of Economics and Finance, 7(7), 254-277.
Uyar, A., & Guzelyurt, M. K. (2015). Impact of firm characteristics on
capital structure choice of Turkish SMEs. Managerial Finance,
41(3), 286-300.
Vallandro, L. F. J., Zani, J., & da-Silva, C. D. S. (2015). IPO market
timing and capital structure: Evidences from Brazil. International
Business Research, 8(1), 24-37.

Page 11 of 12
 School of Management

Yang, Y., Hassan, C. H., Al-Baity, M., & Zou, X. (2015). Determinant of
debt across sectors: Evidence from Chinese a-share listed firms.
The Journal of Developing Areas, 49(4), 391-405.
Yazdanfar, D., & Öhman, P. (2015). Debt financing and firm performance:
an empirical study based on Swedish data. The Journal of Risk
Finance, 16(1), 102-118.
Youssef, A., & El-ghonamie, A. (2015). Factors that determine capital
structure in building material and construction listed firms: Egypt
case. International Journal of Financial Research, 6(4), 46-59.
Yusuf, A. N., Al-Attar, A. M., & Al-Shattarat, H. K. (2015). Empirical
evidence on capital structure determinants in Jordan. International
Journal of Business and Management, 10(5), 134-152.
Zerriaa, M., & Noubbigh, H. (2015). Determinants of capital structure:
Evidence from Tunisian listed firms. International Journal of
Business and Management, 10(9), 121-135.

Word Count: 1,736

Page 12 of 12