ABSTRACT
The dynamic trade-off models of Capital Structure (CS) propose that firms facing different cost of adjustment may take varied paths towards their desire leverage ratios, thereby making the adjustment speed heterogeneous. The study investigates the dynamic trade-off theory of CS of the Nigerian non-financial listed firms with respect to Adjustment Speed (AS) and its determinant. Panel data of seventy-two firms and time series data spanning 2010 to 2019 respectively were collected from the audited annual publication of each firm as published by Nigeria Stock Exchange (NSE), Central Bank of Nigeria (CBN) statistical bulletin and World Bank’s Development Index. Several statistical and econometric techniques of descriptive statistics, correlation analysis, panel unit root test, co-integration test and System Generalized Method of Moment system (GMM) within the dynamic panel and the partial adjustment model were adopted.
Findings suggest that non-financial firms listed on the Nigeria bourse adjust speedily to optimal CS whenever they deviate from equilibrium level at a minimum speed of 81% and maximum speed of 87% irrespective of the leverage proportion in their capital structure or distance from the optimal CS; irrespective of the firm specific, macroeconomic and human resource factors considered in the dynamic model. Also, evidence of heterogeneity in adjustment behaviour is confirmed as under-levered firms adjust faster than over-levered firms. This behavior emanate from the asymmetry of the benefits of being at the optimal (desire). Deviating from the optimal leverage on the upper side (super optimal) is likely to be more costly but closer to optimal leverage ratio than deviating below the target (sub-optimal) that is less costly but farer from the optimal because agency and bankruptcy costs of leverage will intensify quickly as the firm deviates more above the optimal. Hence, sub-optimal (near target) firms adjust faster than super-optimal (off-target) firms due to the low cost of adjustment which is lesser than the benefit of adjustment and the far distance from the optimal leverage ratio. The variation in the dynamic behaviour for super-optimal firms and sub-optimal firms is expected as higher deviation above the optimal makes it more critical for firms to adjust.
From the foregoing analyses, this study concludes that non-financial firms listed in the Nigeria bourse, have target leverage and they deviate and adjust back at a very high speed because adjustment and transaction cost are low and the benefit of adjustment is higher. Also, all the firm specific factors, human resource factors and macroeconomic factors considered in the model were significant determinants of AS to optimal CS. Hence, this study confirms the applicability and relevance of the dynamic TOT in all conditions (general samples and sub-samples) which dominate the behaviour of the firms as first order priority among its counterpart (POT and MMT) theories. This suggests that non-financial firms listed in the Nigeria bourse have CS adjustment policy which they follow to maintain optimal CS. To this extent therefore, formidable evidence that adjustment costs and financial constraints result to information asymmetry in non-financial firm’s adjustment paths and heterogeneity in their adjustment speeds is confirmed, which are consistent generally with dynamic TOT of CS. Hence, this suggests that the CS of listed non-financial companies in Nigerian bourse is financed based on optimal CS, not by the order financial resources and asset pricing.
