An Empirical Analysis of Low-Leverage Behaviour: Evidence from Nigerian Quoted Firms
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Date
2021-11-18
Authors
Paseda, Oluseun
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
Debt conservatism is one of the enduring puzzles in capital structure research. The
reluctance of profitable firms to commit to high debt ratios to exploit tax benefits of
debt has profound consequences for capital structure dynamics. Inspired by studies
examining the persistence of conservative debt usage by firms, this paper examines
the low-leverage behaviour within the Nigerian context, where it is a largely unexplored
area. Using a sample of 50 non-financial corporations quoted on the Nigerian Stock
Exchange (NSE) for the period 1999-2019, the study documents the following findings.
The mean (median) market debt ratio for the entire sample period was 27.5% (19.5%),
corresponding to the 60th (50th) percentile. Firm-years with market leverage ratios
ranging from 40% and downwards to zero percent met the criteria for inclusion in
the observation of low leverage phenomenon (LLP). The mean (median) market
debt ratio for the defined low-leverage sub-sample was 12.7% (9.6%). Conservative
capital structure is evident across the 17 industries embodied in the sample, and debt
conservatism is a declining function of rating, market timing, financing deficit, asset
riskiness and firm size. Conservative behaviour increases with marginal tax rate, non debt tax shields, growth, profitability, liquidity, uniqueness, age, relationship-specific
investments and employee bargaining power. Both managerial conservatism and tax
exhaustion appear to explain the LLP, with the former exerting greater impact.
Description
Keywords
Capital structure; , Debt conservatism; , Low leverage behaviour; , Managerial conservatism; , Tax exhaustion