Dynamic Model of Optimal Capital Structure: Evidence from Nigerian Listed Firms
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Date
2017
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Publisher
Sage Journals
Abstract
Examination of optimal capital structure in financial markets with imperfections suggests that when
deviations from optimal capital structure occur, adjustment costs may prevent firms from moving
towards target capital structure. However, previous studies on the capital structure of non-financial
firms in Nigeria did not consider these imperfections and adjustment costs. It is against this background
that this study investigates the dynamic adjustment to target capital structure by non-financial firms
listed on the Nigerian Stock Exchange. By utilizing a framework that provides for the determination of
adjustment costs, the results reveal the existence of dynamic adjustment to optimal capital structure
suggesting attempts made by the sampled firms to maximize shareholders wealth. A comparison of the
adjustment costs with those of firms in more developed economies shows that Nigerian firms have
higher costs of adjustment indicating that the level of development of the market is important in lowering
transaction costs. In addition, tangibility of assets, non-debt tax shield, growth opportunity, firm size,
profitability and inflation significantly influence Nigerian firms’ optimal capital structure.
Description
Keywords
Adjustment costs, dynamic trade-off theory, generalized method of moments, Nigeria