1Auwalu Sani Ibrahim, 2Isma’il Tijjani Idris Department of Management Science,
Kano State College of Education and Preliminary Studies, Department of Banking and Finance,
ABU Business School, Ahmadu Bello University, Zaria.
Abstract: The study examined the effects of capital structure on share-price of listed industrial goods companies in Nigeria. It was guided by two objectives; to find out the effects of debt and equity financing on share price of listed industrial goods companies in Nigeria. The study adopted ex post facto research design. Whereas, census and filtering techniques were utilised for the companies under study spanning 2006-2016. Secondary data were obtained through the companies’ individual annual reports and database of Nigerian Stock Exchange. The population of the study consists of all the 19 industrial goods companies that were listed as at 31st December, 2016. The study arrived on a final sample size of 12 listed industrial goods companies in Nigeria. While, a panel least squares regression analytical technique was used to evaluate the data for the companies under study. The variables used to analyze the data and interpreting the results were Coefficient, Std. Error, t-Statistic, Probability and standard deviation. Inferential methods such as Pearson test of effects was used to show the link between capital structure and the share price. The findings of the study revealed that both equity and debt financing have significant and positive effects on share price of listed industrial goods firms in Nigeria. The study concluded that, capital structure is a good driver of increasing the share prices among listed industrial goods firms in Nigeria. It is recommended among others that, the management of listed industrial goods firms in Nigeria should employ debt financing, due to tax deductibility of interest charges whereas, lower the cost of capital and ensure higher returns to equity holders.
Keywords: Debt, equity, industrial goods, Nigeria, share price
Introduction
Capital structure is the mix of a firm’s debt and equity which it uses to finance its operations (Abor, 2008). In the analysis of capital structure, the mixture of equity and debt are considered among the major determinants of share price and can affect its value (Oyesola, 2007). Further, the most important goal of a firm is to maximise the market value of shares and the relationship between firm value and capital structure has become a key issue which concentrates on debt and equity capital (Gitman, 2010). However, the major challenge of the listed industrial goods companies in Nigeria is to determine what combination of debt and equity would result in to maximising their share price. However, empirical research revealed that, an increase in the level of debt finance results in enlarged earnings per share but does not necessarily result in increasing the value of firm. The challenge here is to determine what combination of debt and equity would result in to maximising the share price (Erol, 2004; Sinai & Rezaeian, 2005;
Reinhart, 2005).
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In Nigeria, industrial goods sector thought in its growing phase is well performing significantly to the economic growth of the country. Despite the importance of the sector to the economy however, it receives little attention by researchers. This important issue may be one of the many unresolved problems in finance. Moreover, the direction of the research would focus on the effects of capital Structure on Share Price of Listed Industrial Goods Companies in Nigeria.
Nonetheless, from the review of literature on corporate financing has nonetheless postulated firm size as a key determinant of how capital structure affects share prices.
A share price is the value of a single share of a number of saleable stocks of a company, derivative or other financial asset, (Dunstan, Keeper, Troung & Van Zijl, 2011). It is observed that share prices can change any time due to changes in the buying and selling pressure. In this study, the natural logarithm of the average of the highest and lowest share prices for each of the company in each of the years was utilised (Muhammad, 2009). Nevertheless, the purpose of the study is to explore the effects of capital structure (total debt to total assets, equity to total assets to the value of firm) by reviewing the value of firm i.e. share price.
The main objective of this study is to examine the effect of capital structure on share price of listed Industrial Goods companies in Nigeria. Subsequently, in line with the stated objectives of the study, the two hypotheses are formulated in null form.
H01: Debt financing has no significant effect on share price in the listed industrial goods companies in Nigeria.
H02: Equity financing has no significant effect on share price in the listed industrial goods companies in Nigeria.
H03: Firm Size has no significant effect on share price in the listed industrial goods companies in Nigeria.
The rest of the paper is divided into four sections. Section 2 reviews empirical literature and discussed the theoretical framework, section 3 discusses the methodology of the study, section 4 presents and analyzes the data and section 5 concludes.
Literature Review
The study will not be complete without taking a critical look at some past empirical studies in terms of the purpose of the studies, the methodologies that were adopted and the findings of the studies as are related to this current study.
Effect of Debts and Equity Financing on Share Price
Akeem, Terer, Kiyanjui, Kayoed and Matthew (2014) explored the impact of capital structure on the performance of manufacturing companies in Nigeria from 2003 to 2012. Using a regression technique to analyse the effects of some key variables like return on assets, return on equity, total debt to total assets, and equity to total assets ratio on firm performance a negative association was found between capital structure measures (total debt and equity to total assets ratio) and firm performance. The researchers recommended the use of more equity to debt in the financing of business activities, provided the business value is enhanced by the use of debt capital.
Ogbulu and Emeni (2012) conducted an empirical analysis on a sample of 124 companies quoted on the Nigerian Stock Exchange (NSE) for the year ended 31st December 2007. The ordinary least squares method of regression was employed in carrying out this analysis. The result of the study reveals that in an emerging economy like Nigeria, equity capital as a component of capital structure is irrelevant to the value of a firm, while long-term-debt was found to be the major determinant of a firm’s value. Following from the findings of this study,
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corporate financial decision makers are advised to employ more of long-term-debt than equity capital in financing their operations since it results in a positive firm value (Sebastain &
Onuegbu, 2018).
Uwuigbe, Fagbemi and Anusiem (2012) examined the indicators of share prices in the stock exchange market in Nigeria. Using the sampling technique of judgmental, a total of 30 companies were selected and data (2006 - 2010) collected from the stock exchange and annual reports of the firms. The paper modeled the effects of dividend payout, financial leverage and financial performance on share price of listed firms by using regression analysis. The study concluded that dividend payout and financial performance had a significant optimistic link with share prices while financial leverage proxies by debt-equity ratio had significant negative influence on the market value of share prices in Nigeria (Adenugba, Ige & kesinro, 2016).
Methodology
The study embraced the ex post facto and quasi-experimental designs. The choice of ex post facto design is deemed necessary in examining how an independent variable, present prior to the study in the participants, affects a dependent variable. It adopts the method so as to investigate possible cause-and-effect bond. It is also known that, ex post facto design requires some historical base in answering research questions (Sambo, 2005).
The population of the study consists of all the nineteen industrial goods companies that are listed at the Nigerian stock Exchange as at 31st December, 2016. As shown in Appendix I, the criteria of industrial goods companies are based on Nigerian stock Exchange classification and its choice by this study is informed by the need to make generalizations that cover the entire industrial goods companies.
Therefore, census method have been employed for data collection and enhances validity of the collected data by eliminating errors associated with population (Saunders, Lewis & Thornhill, 2009). Similarly, Mugenda and Mugenda (2003), portray that a census is preferred where the population is small and manageable. Also, a two-point filter is used to censure the population of the study. For a company to qualify as part of the census, the company must satisfy the following: Firstly, it must be listed within the period of the study. Secondly, it must have the required data for the study. The first filter is to ensure that the same group of companies is used all over the period of the study so as to satisfy the requirement of a panel study. The second filter is to avoid redundant sample. As a result of the foregoing criteria, five companies are dropped because they failed to meet filter (i) the companies are Austin Laz & Company PLC, Cu tix PLC, Dangote Cement PLC, Paints and Coatings Manufacturers Nig. PLC and Portland Paints and Products Nigeria PLC. Moreover, two companies failed to meet filter (ii) and the companies are African Paints (Nigeria) PLC and Ipwa PLC. Hence, a total of seven (7) companies are dropped from the initial population of nineteen (19) companies. This left the study with a clean filtered twelve (12) listed industrial goods companies as the sample of the study as shown in Appendix II.
Likewise, the study is based on secondary source of data and such data were collected from the annual reports and accounts of the industrial goods companies listed in the Nigerian stock exchange. Though, the data collected were analyzed using Panel Least Square method using 132 observations and 12 cross-sectional units, Time-series length of 11years. Dependent variable: monthly share price SP were used to analyze the data where Coefficient, Std. Error, t-Statistic, Probability and standard deviation were used in interpreting the results. Inferential methods such as Pearson test of effects was used to show the link between capital structure and
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the share price. The regression model was used to determine the relationship between dependent and independent variables. Statistical package of GRETL statistical software version 9.1 was used to analyze the data. The findings from the analysis was organized, summarized and presented using tables.
Multiple regression and correlation analysis was used to determine the nature and significance of relationship between changes in the response variable and change in the predictor variables (determinants) identified in the study. From the above, the two variables of the study can be considered, thus the regression equation model was as below:
Y=β0+ β1X1+ β2X2 + β3X3 +Ɛ……… (1) Where: Y= Dependent Variable – (share price performance)
X1 = Debt Ratio (total debt to total assets) X2 = Equity ratio (equity to total assets) X3 = Firm Size (logarithm of total assets) β0 = Constant Ɛ = error term.
To express this as a panel model, we have:
Y it=β0+β1Xit+β2Xit+β3Xit+Ɛit……… (2) The parsimonious balanced panel model estimated by this study is therefore stated as below:
SP it=α0+β1TDTAit+β2EQTAit+β3SIZEit+Ɛit………. (3) Where:
SP = Share price
TDTA it = Debts ratio (total debt to total assets) EQTA it = Equity ratio (equity to total assets) SIZE it = Firm Size (log of total assets) α0 = Constant
β1, β2, β3 = Coefficients of the explanatory variables Ɛ it = error term
i = cross-sectional observation of firms t = Time period
Results and Discussion
This section discusses the results of the model estimated by the study. Result from the panel regression analysis is presented in the table 4.1 presented below:
Table 4.1 Panel Regression Results
Variables Coefficient T-Ratio
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TDTA 14.39 2.020**
EQTA 0.78 4.991***
SIZE -7.98 -1.217
R-Squared 0.4085
Adjusted R2 0.3947
F-Statistics 29.4685***
*, **, and *** denote significance at the 10%, 5% and 1% levels respectively
From the result on model summary R- square = 0.409, adjusted R- square= 0.395, and the S.E.
of regression 14.697. Multiple correlation R coefficients indicate the degree of linear relationship of the dependent variable (share price) with all the predictor variables, whereas the coefficient of multiple determinations R-square shows the provision of the variation in firms share price that is explained by the independent variables, debts and equity in the regression equation. The R-square gives us the coefficient of determination between the variables the results from the regression analysis give an R-square value of 0.409, which means that 41% of the independent variables cause the change on dependent variable. However, the findings of the study shows that taking all other independent variables constant, a unit increase in debts will lead to a 0.143 increases in share price, a unit increase in equity will lead to a 0.78 increases in share price.
Finally, it was observed that, firm size SIZE has negative and insignificant effect on share price of listed industrial goods firms in Nigeria. Further, this implies that firm size didn’t generally play an insignificant and negative role in determining the direction of the share price.
Owing to the above outcome reported as regards to the result of test of null hypothesis H01 that debt TDTA do not significantly affect share price, this was further supported by a p value of 0.0454 which is lower than 0.05. Thus, the study failed to accept null hypothesis H01. The t-statistics is 2.0208, while the coefficient is 14.3939, which signifies that TDTA do positively significantly affects share prices. The results from the findings supports that higher debt ratios could lead to optimistic management expectations and is associated with future cash flows.
This therefore means that debt may result to shifts in the share prices of securities in a firm and hence have a general influence on the share price of a firm. Also, Majumdar and Chhibber (1999) found significantly negative effect of level of debt on firm share price.
The result test of null hypothesis H02 that EQTA does not significantly affect share price is further supported by a p value of 0.000 which is less than the significant value of 0.05. These findings are supported by Abdul, (2016) who researched on the link between capital structure decisions with the performance of engineering firms and its sector of Pakistan, the results showed that monetary leverage established by debt that is short term to total assets and total debt to total assets had a significantly correlation with the firm performance measured in terms of return on assets. Therefore, the study failed to accept the null hypothesis H02. The t-statistics is 4.991005 and coefficient of 0.777708, this signifies that EQTA does positively and significantly affect share price.
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Overall, the variables of capital structure (TDTA and EQTA) cumulatively affected share price with an adjusted R-square of 0.394655. This shows that capital structure could lead to variations in share price by 39.4655%. The p-value of F-statistics is 29.4685, which shows that, the model used in the study could be used to establish a relationship between the variables used in the study.
Conclusion
From thus study, it is concluded that borrowing money increases the debt ratio thus affects the share price, increasing the debt ratio may reduce a firm’s cost of capital, minimizing the cost of capital maximizes the debt ratio which positively affects the share price, more over debt ratios leads to optimistic management expectations and probable future cash flows. This is supported by the theory of pecking order proposed by Myers and Majluf (1984). The theory states that firms favour internal finance sources; they employ their target dividend payout ratios to their investment opportunities although payout ratios and dividends are gradually familiar to shifts in the degree of important investment opportunities.
Lastly it is agreed that capital structure decisions enhance performance of shares at Nigeria Stock Exchange market, although the decisions are critical as a shift in leverage could increase or decrease the financial strains on companies share prices, also an increase in debts leads to an increase in a companies’ share price, availability of cheap debt enables firms to take advantage of cheap credit for expansion and profitable investments. This is supported by Mensah (2004) who states that a firm’s capital structure is a composition or structures of its liabilities which affects the share prices performance of any organization. The level of share price has been considered very significant specifically as an alternative for market liquidity.
Investment in securities is also significant to expansion a country’s economy and corporate bodies in general. If there is a developed economic environment and managers and stakeholders in the corporate level have the positive expectations about the future, they would normally want to expand. Kheradyar and Matnor (2011) also state that share price is usually used as a benchmark to gauge firm’s performance and its variations as an pointer of the economic status, or otherwise, of a firm hence the need to be well-known with the indicators that could negatively affect share prices.
Further, the study recommends among others that, the listed Industrial goods firms in Nigeria should increase the ratio of their total debt to total assets as this will guarantee them less tax burden on those assets financed by debt and also enhances the value of the firm (share prices) thereby increasing the financial performance of the organization.
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138 Appendix: I
Population of the Study
S/N NAME OF COMPANY YEAROFLISTING
1 African Paints (Nigeria) Plc. 1996
2 Ashaka Cement Plc. 1990
3 Austin Laz & Company Plc. 2012
4 Avon Crowncaps & Containers Plc. 1994
5 Bergers Paints Plc. 1974
6 Beta Glass Co. Plc 1986
7 Chemical and Allied Products Plc. 1978
8 Cement Company of northern Nig. Plc. 1993
9 Cutix Plc. 2008
10 Dangote Cement Plc. 2010
11 DN Meyer Plc. 1979
12 First Aluminium Nigeria Plc. 1992
13 Grief Nigeria Plc. 1979
14 Ipwa Plc. 1978
15 Lafarge Wapco Plc. 1979
16 Nigeria Ropes Plc. 1978
17 Paints and Coatings Manufacturers Nig. Plc. 2010 18 Portland Paints & Products Nigeria Plc. 2009
19 Premier Paints Plc. 1995
Source: NSE, 2018
139 Appendix: II
Census Sample of the Study
S/N NAME OF COMPANY YEAR OF LISTING
1 Ashaka Cement Plc. 1990
2 Avon Crown caps & Containers Plc. 1994
3 Berger’s Paints Plc. 1974
4 Beta Glass Co. Plc 1986
5 Chemical and Allied Products Plc. 1978
6 Cement Company of northern Nig. Plc. 1993
7 DN Meyer Plc. 1979
8 First Aluminums Nigeria Plc. 1992
9 Grief Nigeria Plc. 1979
10 Lafarge Wapco Plc. 1979
11 Nigeria Ropes Plc. 1978
12 Premier Paints Plc. 1995
Source: NSE, 2016
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