Capital Structure and Firm Value

ABSTRACT

This study investigated the effect of capital structure on the firm value across firms’ life cycle using non- financial quoted firms in Nigeria Security Exchange. Seventy six (76) non-financial firms in the Nigerian Security Exchanges were used in the analysis for the period 2011 to 2020. A dynamic framework was also devised for the panel data analysis using the system GMM estimation technique.

The result shows that long-term debt to equity does not significantly affect firm value of non-financial firms under various stages of firm life cycle, while short-term debt to equity has significant influence on maturity, shake-up and decline stages of the firm life cycle. Also total debt to equity has significant influence on shake-up and decline stages of the firm value of non-financial firms under various stages of firm life cycle. The outcome reveals that most of the effects were on maturity, shake-up and decline stages of the firm life cycle.

The findings suggest that maximizing the firm value requires a perfect combination of the different debt structures and equity. The results from the study however show that there are optimal stages in the firm life cycle where capital structure matters significantly for improving firm value. It is therefore recommended that firms in lower stages of the life cycle may not need to specifically focus on the type of debt that they are using. While preference should be given to short term debt, firms operating at the earlier stages of the businesses cycle need to enhance their long-term capital structure at this earlier stage before the deep discrimination in their effects on firm value begin to be critical at later stages of the life cycle.  In this regard, the short-term debts are shown to be critical for expanding the market value of a firm.