THE DETERMINANT OF DEBT MATURITY IN SELECTED NIGERIAN FIRMS

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 The study therefore examined the determinants of debt maturity in selected Nigerian firms. The study evaluated the determinants of debt maturity of selected firms in Nigeria using the following variable: independent variables; firm size, firm leverage, firm’s asset maturity and firm credit quality and dependent variable debt maturity. The study is set out to: ascertain the nature of relationship between firm’s size (x1) and debt maturity (Y); establish the nature of relationship between the firm’s leverage (x2) and debt maturity (Y); establish the nature of relationship between firm’s asset maturity (x3) and debt maturity (Y); establish the nature of relationship between firm’s credit quality (x4 ) and debt maturity (Y). The study utilised secondary data. Given the nature of the objectives and hypotheses of the research, the data were extracted from the published report of some quoted firms’ annual reports. The period for the study was 2007 – 2011. The population of the study was 241 firms quoted in Nigeria stock exchange as at 2011, while the sample size, using purposive sample size, were eight (8) firms. Correlation coefficient technique and coefficient of multiple determinations (R – Square), were used to analyze the objectives while t_ statistics was used for statistical significance. Result from the regression equations showed that the coefficients of firm’s size and firm’s asset maturityhave a positive impact on the dependent variable debt maturity with values 0.065 and 0.559 respectively; also, firm’s leverageand firm’s credit qualityhave negative impact on the dependent variable debt maturity with values -0.414 and -0.112 respectively. The R – Square of the independent variables with the dependent variable is 0.441. This shows a positive relationship between independent variable with the dependent variable. However, the t_ statistical test for firm’s size has significant impact on debt maturity (t1 = 0.368 < 2.132), that of firm’s leverage has no significant impact on Y (t2 = -2.417<2.132). The statistical coefficient of firm’s asset maturity has a  significant impact on debt maturity (t3 = 4.080 >2.132), and that of  firm’s credit quality has no significant impact on debt maturity (t2 = -0.057 < 2.132).

We concluded that firm’s asset maturity is the only significant variable in forecasting the debt maturity, (Y), therefore recommend that firms in Nigeria should use asset maturity as a proxy in the determination of their debt maturity.

TABLE OF CONTENTS

   Page

Title Page         …                     …                     …                     …                                  i

Approval page…                    …                    …                                             ii        

Certification                                  …                     …                                 iii

Dedication                …                     …                     …                                 iv

Acknowledgements…                     …                    …                                            v

Abstract                      …                    …                    …                                vi.

Chapter One:  INTRODUCTION                                     

1.1       Background of the Study                  …                    …                                  1

1.2       The Statement of Problem                    …                                              2

1.3       Objectives of the Study             …                    …                                  3

1.4       Research Questions         …                    …                                              3

1.5       Hypotheses                    

1.6       Significance of the Study.               …                                              4

1.7       Scope of the Study                       …                    …                                  5

1.8       Limitations of the Study            …                    …                                  5

            References                              …                           …                                  7

CHAPTER TWO:  REVIEW OF RELATED LITERATURE

2.1       The determination of debt maturity an over view                     8

2.2     Capital structure of  a firm.                   …                      10

2.2.1    Capital Structure in Perfect Market    …                                        11

2.2.2 The optimum capital structure of a firm                                               12

2.2.3    Trade-off Theory                    …                    …                    …            12

2.2.4    Pecking Order Theory                             …                                            13

2.3     Debt versus equity in practice: overview..                                13

2.3.1 Distinguishing between debt and equity …                  …                       15

2.3.2 Using option Theory      …                                          16

2.4       Formulation of Financial Plan             …                            17

2.4.1 Simplicity                        …                   …                                              17

2.4.2 Flexibility                                   …                                                17

2.4.3 Foresight                                    …                    …           

2.4.4 Effective utilization of fund                  …                                      18

2.5    Types of short-term investment opportunities                        18

2.5.1 Choice of  debt  type     …          …                                            19

2.6 Banks with imperfect information                 ….                                           22

2.6.1  Symmetric information                         …….                                       23    

2.6.2 Assymmetric information and adverse selection  …….                 23

2.7   Tax                                  …………                     24

2.7.1 Tax incentives to companies ………        ……………..                 25

2.7.2 The status of pioneer industries            ……………….                 25

2.7.3  Tax relief to small companies    ……… ………………                 26

2.7.4  Company tax and cost of capital  …………        26

2.8       Loans                                                                               26

2.8.1  Loan size       …………………………..                        27

2.8.2  Elasticity of demand for loans   ……………..                              27

2.9   Agency costs                                ………………….                          28

2.9.1 Cost of debt          …………………………………..                          29

2.10 Banks as a financial intermediary …………………………… 30

2.10.1 Evolve of bank  loan ………………………………31

2.10.2 Commercial and industrial loans (CL)    ……………     32

2.11  The bank as a firm: loan…….. …………….                      ….                      33

2.11.1  Purely competitive banks     ………………… ……………… 33

2.12 Cost of debt   …………………………..                                                34

2.13  Debt market ………………………………… 36

2.13.1 Debt overhang………………………. …………………                               36

2.14  The determination of corporate debt maturity ………………………… 37

2.14.1 Under investment hypothesis…………………………     ……………38

2.14.2 Liquidation risk hypothesis  ………………………. …39

2.14.3 Tax hypothesis  …………………………………………….     40

2.14.4 Floatation cost hypothesis ……………    …………….             41

2.14.5 Maturity matching hypothesis………………………… 41

2.14.6  Firm size ………………………………………         42                       

2.14.7 Firm credit quality hypothesis………………                                  43

2.14.8 Signaling  hypothesis ………………… ………………………         43

2.15   Interest rate on the debt maturity …………………………   44                       References                   …                    …                                 47

CHAPTER THREE: RESEARCH METHODOLOGY  …        …                    50

3.1       Research Design                     …                    …                                          50

3.2       Nature and sources of data                 …                                          50

3.3       Population and Sample Size Determination                          51

3.4       Specification of model                                                                         52

3.5       Validation and Reliability of data collection instrument…           54

            References       …                    …                    …                                   55

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction                   …                    …                                                 56

4.2 Analysis and interpretation of data  using correlation Coefficient Technique        …                   …                                                  57

  • Analysis  and interpretation f Data using multiple Coefficient of determination      …        …                    …                               60

4.4     Analysis of Regression summary    output using  T_ statistics  61

CHAPTER FIVE – SUMMARY OF RESEARCH FINDINGS, CONCLUSION,   RECOMMENDATIONS    …                                                                          64

5.1     Introductions          …                    …                    …                                      64

5.2     Summary of Research findings                                          65

5.3   Conclusion                         …                    …                                      66

5.4    Recommendations         …   …                    …                                                  68

5.5       Bibliography                   …                    …                                                  69

  Table  4.2                                                                                                               76

Appendix1……………………………….…………..                   80

                                                               INTRODUCTION

  1. BACKGROUND OF THE STUDY

Capital structure refers to the mix of long-term sources of funds, such as debentures, long-term debt, preference share capital and equity share capital including reserves and surpluses (i.e. retained earnings).  Some firms do not plan their capital structure, and it develops as a result of the financial decisions taking by the financial manager without formal planning. These  firms  may prosper in short-run, but ultimately they may face considerable difficulties in raising funds to finance their activities. With unplanned capital structure these firms may also fail to economise their capital structure to maximize the use of the funds and to be able to adapt more easily to the changing conditions.

The technique of cash flow analysis is helpful in determining the firms debt capacity. Debt capacity is the amount which a firm can service easily even under adverse condition; it is the amount that the firm should employ. There may be lender who is prepared to lend to firm, but firm should borrow only if it can service debt without any problem. A firm can avoid the risk of financial distress if it maintains its ability to meet contractual obligation of interest and principal payment.

However, every firm has to choose what source of financing to use in making its decision. It should choose between debt and equity or both. Majority of Nigerian firms have not enough resources for their growth. This is why it is necessary for them to issue debt. In the conditions of macroeconomic uncertainty, it is necessary for firms to choose optimal sources of financing, because they have to support their stability and use capital more efficiently than their competitors.

Furthermore, a firm’s choice of debt maturity is an integral part of its capital decision. Firms which select an inappropriate maturity structure of payments risk serious financial difficulty. For example, a firm which finances new project with debt of short maturity, risks an unwanted rise in borrowing costs or even liquidation when credit conditions deteriorate. Likewise, firms which finance new projects with debt of long maturity may have unnecessarily high borrowing costs.

Motivated by the potentially large impact that inappropriate debt maturity choice can have on firm’s financial condition, we documented the determination of the debt maturity using eight (8) firms in Nigeria between 2007 and 2011. We used purposive sample size. It is our hope that a better understanding of the determinants of debt maturity can help financial expert build and refine model to guide corporate decision makers to face the debt maturity choices. Our empirical tests were based on the existing models.

THE DETERMINANT OF DEBT MATURITY IN SELECTED NIGERIAN FIRMS