Determinants of Capital Structure of Listed Construction Companies in Nigeria
Chapter One
Objectives of the Study
The main objective of this study is to examine the determinants of capital structure of listed construction companies in Nigeria. However, the specific objectives of the study are:
- To understand how the construction firms’ sizes in Nigeria impact their performance.
- To examine the extent to which total debt to total asset ratio affect financial performance of listed construction firms in Nigeria.
- To investigate the effect of total debt to total equity ratio on financial performance of listed manufacturing firms in Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
The term capital structure refers to the percentage of capital (money) at work in a business by type. It is a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity and it simply describes how a firm finances its overall operations and growth by using different sources of funds. Broadly speaking, there are two forms of capital: equity capital and debt capital. Each has its own benefits and drawbacks and a substantial part of wise corporate management is attempting to find the optimal capital structure in terms of risk/reward payoff for shareholders. A firm’s capital structure is then the composition or structure of its liabilities. For example, a firm that sells N30 billion in equity and N70 billion in debts is said to be 30% equity-financed and 70% debt-financed. The firm’s ratio of debt to total financing, 70% is thus referred to as the firm’s leverage which can also be described as its gearing ratio – the proportion of the capital employed of the firm which comes from outside of the business finance. The capital structure of a firm or more specifically the firm’s debt-to-equity ratio, provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. Thus the concept and an understanding of the capital structure of a firm are extremely important because it can influence not only the return a firm earns for its shareholders, but whether or not a firm survives in a recession or depression. Capital structure decisions are very difficult to make in uncertain economies. In developing economies in particular, the existence of macro environment factors such as high and soaring interest rates, volatility in economic and political situations are important factors that determines the capital structure of firms. The presence of the factors above causes financing decisions to experience a significant rise; in addition the diminution or dwindling economic activities also raises uncertainty. Knowledge about capital structures have mostly been derived from data in developed economies that have many institutional similarities (Booth et al., 2001). Since different countries have different institutional arrangements, mainly with respect to tax and bankruptcy codes, existing market for corporate control, and the roles of banks and securities markets, it might prove inadequate to infer that what occurs in the developed economies or what determines their capital structure can be used to explain what is obtainable in the developing countries like Nigeria. In addition, there are differences in social and cultural issues and in the levels of economic development thus the need to examine differently the determinants of capital structure for firms in developing economies. According to Bas et al, (2008) most capital structure studies to date are based on data from developed countries. The few studies that have been done on developing countries hardly seem to agree as noted by Abor (2008). For instance, Singh and Hamid (1992) and Singh (1995) used data on the largest companies in selected developing countries and found that firms in developing countries made significantly more use of external finance to finance their growth than is typically the case in the industrialized countries. In a subsequent study, they again found that firms in developing countries rely more on equity finance (internal finance) than debt finance. In an Indian study by Cobham and Subramaniam (1998), using a sample of larger firms, found that Indian firms use substantially lower external and equity financing. Meanwhile in a study of large companies in ten developing countries, Booth et al.
(2001) also found that debt ratios varied substantially across developing countries, but overall were not out of line with comparable data for industrial countries. According to them, “In general, debt ratios in developing countries seem to be affected in the same way and by the same types of variables that are significant in developed countries. However, there are systematic differences in the way these ratios are affected by country factors, such as GDP growth rates, inflation rates, and development of capital markets.”
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to the determinants of Capital Structure of Listed Construction Companies in Nigeria.
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information the determinants of Capital Structure of Listed Construction Companies in Nigeria. 200 selected staffs of construction companies in Lagos state was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain determinants of Capital Structure of Listed Construction Companies in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of determinants of Capital Structure of Listed Construction Companies in Nigeria
Summary
This study was on determinants of Capital Structure of Listed Construction Companies in Nigeria. Four objectives were raised which included: To understand how the construction firms’ sizes in Nigeria impact their performance, to examine the extent to which total debt to total asset ratio affect financial performance of listed construction firms in Nigeria and to investigate the effect of total debt to total equity ratio on financial performance of listed manufacturing firms in Nigeria. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staffs of selected construction companies. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made supervisors, administrative staffs, accountants and junior staffs were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The leverage has served as an important determinant factor in capital structure decision of construction firms in Nigeria, which help to prevent abuses and other irregularities by the firms in sourcing the financial mix of the listed construction firms in Nigeria, prevent fraud and maximize shareholders’ wealth and enhanced the value of the listed construction firms in Nigeria. More so, to generate employment, revenue and increase industrial development. There is a need for the regulatory authority to monitor the level of leverage in listed construction firms in Nigeria in order to reduce the shock of bankruptcy. Leverage has minimized the risk of managers from engaging in earnings management. The higher levered the firm is, the lower the risk of liquidation because of high scrutiny from debt financiers.
Recommendation
The regulatory authority such as SEC should make it mandatory for listed construction firms in Nigeria should have some optimum level of leverage in their capital structure financing. – SEC should make sure that listed construction firms in Nigeria disclose their report promptly and the external auditors should be mandated to report on the performance of the firms’ audit.
References
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- Adesola, W. A. (2009), Testing Static Tradeoff Theory Against Pecking Order Models of Capital Structure in Nigerian Quoted Firms, Global Journal of Social Sciences 8(1), 2009: 61-76, Bachudo Science Co. Ltd Printed in Nigeria. 3.
- Alza, T. & Hussain, A (2011), Determinants of Capital Structure across Selected Manufacturing Sectors of Pakistan. International Journal of Humanities and Social Science 1(12) 254 – 262 4.
- Baral, K. J. (2004), Determinants of Capital Structure: A Case Study of Listed Companies of Nepal. The Journal of Nepalese Business Studies 1(1) 1 – 13 5.
- Bas, T., Muradoglu, G., & Phylaktis K., (2009), Determinants of Capital Structure in Developing Countries, Cass Business School, 106 Bunhill Row, London, U.K. 6.
- Buferna, K., Bangassa, K., & Hodgkinson, (2005) Determinants of Capital Structure: Evidence from Libya, School Of Management, University Of Liverpool, Chatham Street, Liverpool
- Coleman, S. (n.d.). Capital Structure in Small Manufacturing Firms: Evidence from the Data University of Hartford The Journal of Entrepreneurial Finance & Business Ventures, 11( 3) 105 – 122 10.
