AHAM
NZENWATA
Abstract
This study was embarked on to investigate the
determinants of capital structure among companies in the brewery industry in
Nigeria. For the purpose of the study, data was collected from the annual
financial report of two brewery companies namely NB PLC and Guinness PLC for
the period 2007 to 2014. The result of data analyses for the study as detailed
in the section above indicate the debt ratio contribute positively to
profitability, firm growth rate, asset tangibility and firm size. This outcome
is partly in line with findings of Ishaya et al (2013) in the Chemical and
Paints industry who find a similar relation between firm size, growth rate age
of the firm and debt equity ratio. Furthermore, our results also indicate that
only asset tangibility was statistically significant in explaining the capital
structure of the brewery industry in Nigeria. From the above we can infer that
although debt to equity ratio is positively related to profitability size,
asset tangibility and the growth rate of the brewery industry in Nigeria, the
size of the effect(s) is minimal. Hence, conclude that except for asset
tangibility, the above variables as posited in literature cannot be relied on
to explain the capital structure of the brewery industry in Nigeria.
1 INTRODUCTION
The
term capital structure refers to the percentage of capital (money) at work in a
business by type. Broadly speaking, there are two forms of capital: equity
capital and debt capital. Each has its own benefits and drawbacks and a
substantial part of wise corporate stewardship and management is in attempting
to find the optimal capital structure in terms of risk/reward payoff for
shareholders.
The
study of capital structure attempts to explain the mix of securities and
financing sources used by corporations to finance real investment (Myers, 2001).
In general, a firm can choose among many alternative capital structures. It can
issue either equity or debt capital or a large amount of debt capital and
little amount of equity capital and vice versa. It can arrange lease financing,
issue convertible bonds and other hybrid securities. The firm can also issue
dozens of distinct securities in different combinations; however, the rational
attempt is to find the particular combination, which maximizes overall market value
of the firm (Gajurel, D. P. 2005).
In the course of trying to set an
optimal capital structure, the practices of firms are normally different. There
are so many firm specific and external variables, which affect capital
structure management. One of the most important issue facing financial managers
is the relationship between capital structure and the stock prices. That is why
there are various theories of capital structure that try to explain this
cross-sectional variation.
In
as much as wealth maximization remains a primary motive to going concern
business firms, capital structure decision should be regarded as expedient and
indispensable phenomenon to business firms, as it facilitates maximisation of
return on investment over a long-run perspective while risk is minimized
through boosting the efficiency of project financing, financing of mergers,
acquisition and expansion as well as dividend decisions. Capital structure
which is the proportion of financing mix of a firm in the form of
debt-to-equity ratio may thus be perceived as pivotal to the growth and future
of a firm (Ishaya L. C et al; 2013).
A search through literature
indicates that very little research has been carried out toward identifying the
determinants of capital structure among corporate organisations in Nigeria.
This lack of research on the determinants of capital structure is even more
evident when considered on sector by sector basis. It is this lack of
information/research that necessitated this study.
Considering the importance of
capital structure in the investment decision of firms, we intend to conduct an
in-depth empirical investigation into the determinants of capital structure in
the brewery industry in Nigeria with special emphasis on the breweries that are
quoted on the Nigeria Stock Exchange.
2 REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework
There
are basically two components to capital structure. These are Shareholders funds and Borrowed funds.
Shareholder's
Funds
In
components of capital structure, shareholder's funds (owned capital) means
funds provided or contributed by the owners. Various constituents of
Shareholders' capital are:
i.
Equity
Share Capital: In components of Capital
structure, equity share capital represents the ownership capital of the
company. It is the permanent capital and cannot be withdrawn during the
lifetime of the company. They are the real risk bearers, but they also enjoy
rewards. Their liability is restricted to their capital contributed. Equity
shares are popular among the investing class.
ii.
Preference
Share Capital: In components of capital structure,
preference shareholders are also owners of the firm, and they get preference
regarding payment of dividends and repayment of Capital. They are cautious
investors. Preference Shares carry a stipulated dividend. Preference Shares are
of different types such as: Redeemable and Non-Redeemable, Convertible and
Non-Convertible, Cumulative and Non-Cumulative preference shares.
iii.
Retained
Earnings: In components of capital structure,
instead of distributing all the profits to shareholders by way of a dividend,
the firm may retain/save a part of the profit for self-financing. Retained
earnings constitute the sum total of those profits which have been realized
over the years and have been reinvested in the business. Thus, it is also known
as self-financing or ploughing back of profits. Thus, it is also known as
self-financing or working back of profits.
Borrowed
Capital
Borrowed
capital is the amount raised by way of loans or credit. Various parts of
borrowed capital are:
i.
Debentures:
In components of capital structure,
debenture capital is a part of borrowed capital. The creditors of the company
are the debenture holders. Different types of debentures are issued for the
convenience of investors.
ii.
Term
Loan: In components of capital structure,
organizations can obtain long-term and medium term loans from banks and
financial institutions. Further, banks advance loans in US dollar. Term loans are
repayable by instalments. For obtaining term loans, collateral security has to
be offered by the organization.
2.2 Theoretical Framework
Following
the seminal research of Modigliani and Miller (1958) on the irrelevance of
capital structure in the firm’s investments decision, quite a number of other theories
have been propounded in an effort to explain the determinants capital structure
of corporate organisations. Among these are the Pecking Order Theory, Trade-off
Theory and the Agency Theory.
The
pecking order model tested by Myers and Majluf (1984) shows that the use of
private information is the only source through which firm managers seek to
issue risky and overpriced securities, as a result of which an outside investor
will demand a higher rate of return on equity than on debt. Myers (1977) has
argued that the pecking order model does not explain firms’ dividends
distribution. However, when firms choose to pay dividends for other reasons,
pecking order choices should affect dividend decisions.
The
pecking order theory suggests that firms use a ranked structure to select
sources of external financing only because the amount of mispricing and loss of
wealth to shareholders both depend on the type of security issued. The amount
of loss is lowest for debt and highest for external equity because new
information affects the value of a security (Attiya and Qaisar, 2012).
From
the standpoint of the Trade-off theory, firms that are more profitable should
issue more debt because they have more profits to protect from taxation.
However, some studies have criticized this argument as higher profitability
means lower expected costs of financial distress and, moreover, firms use more
debt relative to book assets (Fama & French, 2002).
The
Trade-off Theory postulates that larger and more mature firms use more debt
while managers are agents of shareholders and their interests may be in
conflict with those of shareholders such that debt is considered a controlling
device. Bankruptcy is costly for managers since they can be displaced and thus
lose their job benefits.
Finally, Agency Theory provides
another explanation for why debt can be used as a controlling mechanism in
agency costs between managers and shareholders-creditors may act as monitors of
managers’ investment decisions. However, these capital structure decisions do
not necessarily control agency costs-the agency cost of debt comprises the
problem of excessive dividends, issuance of senior ranking debt, asset substitution,
and underinvestment (Smith & Warner, 1979), which measure the possibility
of bankruptcy and restructuring the debt and the cost of monitoring debt
agreement. A firm with higher debt financing is more likely to have an agency
cost of debt.
2.3 Review of Related Empirical Literature
In
the study on the Determinants of Capital Structure in the Nigerian Chemical and
Paints Sector by Ishaya et al (2013) using the OLS regression method, they find
that: for the Nigerian Chemical and Paints sector, tangibility and
profitability have significant impact on leverage at 1% level, while size,
growth and age have insignificant impact on the dependent variable.
Their
study also showed that the coefficients of tangibility and profitability are
negative. The effect of tangibility on capital structure suggests a negative
relationship between tangibility and leverage contrary to both trade off theory
and pecking order theory. Also the relationship between growth rate and level
of leverage contradict both the pecking order and the trade off theory.
Using
three accounting based measures of financial performance (return on Equity,
return on Assets and gross profit margin) Ibrahim (2009) examined the impact of
capital structure choice on firm performance in Egypt, using a multiple
regression analysis in estimating the relationship between leverage level and
firm’s performance, the study cover between 1997 and 2005. The result revealed
that capital structure choice decision in general, has a weak-to-no impact on
firm’s performance.
Stulz (1990) noted that debt can
have both a positive and negative effect on the value of the firm (even in the
absence of corporate taxes and bankruptcy cost). He built a model in which over
investment and under investment can be can be alleviated by debt financing. His
model assumes that managers have no equity ownership in the firm and receive
utility by managing a larger firm. The “power of manger” may motivate the
self-interested managers to undertake negative present value project. In order
to solve this problem, shareholders force firms to issue debt.
3 METHODOLOGY
We adopted the OLS Regression
Analysis Method to analyse the data collected for the purpose of the study.
Data used in the study were collected from Annual financial reports of 2
brewery companies - namely Nigeria Breweries PLC and Guinness Nigeria PLC for
the period 2007 to 2014. The choice of these firms was as result of the availability
of information/data. As shown in
previous empirical research, there are at least 8 factor that can determine the
capital structure of the firm. These are size, profitability, tangibility,
growth opportunities, tax, non-debt tax shields, volatility, and industry
classification. From these, we chose those that are readily retrievable from
the annual financial reports these are: Profitability, Growth, Tangibility and
Size (Bauer P. 2004). Given the above, we state that:
DR = f(PROF, GROWTH,
TANG, SIZE ) Hence,
DR = B0 + B1PROF + B2GROWTH + B3TANG
+ B4SIZE + ei
Where:
DR = DEBT RATIO
PROF = PROFITABILITY
GROWTH
= GROWTH
TANG = TANGIBILITY
OF ASSETS
SIZE = SIZE
OF THE FIRM
·
While
Debt Ratio (DR) is measured by the Ratio of Debt Financing to Capital Employed
·
Profitability
(PROF) is measured as Profit After Tax (PAT) Divided by Capital Employed
·
Growth
is measured as a percentage increase in Total Assets
·
Tangibility
of Assets (TANG) is measured as Fixed Assets divided by Net Total Assets
·
Size
of the firm is measured as the Total Assets of the firm
4 DATA ANALYSIS AND RESULTS
4.1 Data Presentation
|
FIRM
|
PERIOD
|
DEBT
RATIO
|
PROFITABILITY
|
GROWTH
|
TANGIBILITY
|
SIZE
|
|
GUINNESS NIG PLC
|
2007
|
0.0907
|
0.2770
|
0.0306
|
0.9521
|
7.7942
|
|
2008
|
0.0000
|
0.2861
|
0.0906
|
0.9965
|
7.8399
|
|
|
2009
|
0.0000
|
0.3910
|
-0.1340
|
1.0497
|
7.9501
|
|
|
2010
|
0.0330
|
0.3487
|
0.1175
|
1.1183
|
8.0389
|
|
|
2011
|
0.0294
|
0.3953
|
0.1653
|
1.1444
|
8.0922
|
|
|
2012
|
0.1400
|
0.2338
|
0.3881
|
1.9759
|
8.0662
|
|
|
2013
|
0.1260
|
0.1700
|
0.1501
|
1.9139
|
8.0880
|
|
|
2014
|
0.3114
|
0.1087
|
0.0300
|
2.0124
|
8.0382
|
|
|
NB PLC
|
2007
|
0.2679
|
0.4825
|
-0.0024
|
1.1624
|
8.0482
|
|
2008
|
0.2851
|
0.5178
|
0.2602
|
1.9721
|
8.1627
|
|
|
2009
|
0.0725
|
0.4316
|
0.0873
|
1.4817
|
8.2154
|
|
|
2010
|
0.0780
|
0.5149
|
0.0684
|
1.4709
|
8.2692
|
|
|
2011
|
0.2311
|
0.2961
|
1.2037
|
1.2339
|
8.3166
|
|
|
2012
|
0.2698
|
0.2281
|
0.2049
|
1.5233
|
8.4026
|
|
|
2013
|
0.0590
|
0.2826
|
0.0544
|
1.3650
|
8.4291
|
|
|
2014
|
0.1049
|
0.1808
|
0.4110
|
1.1262
|
8.4255
|
Source(s): Various Annual Reports of
Guiness PLC and NB PLC (2007-214)
4.2 Data Analyses and interpretation
Data
collected for purpose of the study was analysed E-views
|
Dependent Variable:
DR
|
||||
|
Method: Least
Squares
|
||||
|
Date: 06/29/15 Time: 14:00
|
||||
|
Sample: 1 16
|
||||
|
Included
observations: 16
|
||||
|
Variable
|
Coefficient
|
Std.
Error
|
t-Statistic
|
Prob.
|
|
C
|
-0.286890
|
1.144323
|
-0.250708
|
0.8067
|
|
PROF
|
0.033326
|
0.208462
|
0.159866
|
0.8759
|
|
GROWTH
|
0.094734
|
0.092352
|
1.025795
|
0.3270
|
|
TANG
|
0.157054
|
0.069773
|
2.250920
|
0.0458
|
|
SIZE
|
0.020648
|
0.143673
|
0.143718
|
0.8883
|
|
R-squared
|
0.397072
|
Mean dependent var
|
0.131175
|
|
|
Adjusted R-squared
|
0.177825
|
S.D. dependent var
|
0.107205
|
|
|
S.E. of regression
|
0.097207
|
Akaike info criterion
|
-1.573649
|
|
|
Sum squared resid
|
0.103940
|
Schwarz criterion
|
-1.332215
|
|
|
Log likelihood
|
17.58919
|
F-statistic
|
1.811072
|
|
|
Durbin-Watson stat
|
1.300078
|
Prob(F-statistic)
|
0.196979
|
|
From
the data analyses and shown above, our results indicate that the coefficients
of the independent variables: Profitability (PROF), Firm Growth (GROWTH), Asset
Tangibility (TANG) and Firm Size (SIZE) with
B coefficients of 0.0333, 0.0947, 0.15705 and 0.0206 respectively all
have positive relationship with the dependent variable Debt Ratio (DR). The
implication of this result is that as the Profitability, Growth rate, Asset
Tangibility and Size of breweries in Nigeria increases, the ratio of debt to
equity financing increases is also predicted to increase.
Our
results also indicate that of the four (4) independent variables only Asset
tangibility had a statistically significant relationship with Debt Ratio
implying that profitability, Growth rate and firm size cannot be relied on to
explain the debt ratio of the brewery industry in Nigeria.
Finally, the
results show that only 39.71% of the changes in the debt ratio can be explained
by Profitability (PROF), Firm Growth rate (GROWTH), Asset Tangibility (TANG)
and Firm Size (SIZE) leaving a substantial 60.39% of the changes in debt ratio
unexplained.
5 DISCUSSION, CONCLUSION AND RECOMMENDATION
This
study was embarked on to investigate the determinants of capital structure
among companies in the brewery industry in Nigeria. For the purpose of the
study, data was collected from the annual financial report of two brewery
companies namely NB PLC and Guinness PLC for the period 2007 to 2014.
The
result of data analyses for the study as detailed in the section above indicate
the debt ratio contribute positively to profitability, firm growth rate, asset
tangibility and firm size. This outcome is partly in line with findings of
Ishaya et al (2013) in the Chemical and Paints industry who find a similar relation
between firm size, growth rate age of the firm and debt equity ratio.
Furthermore,
our results also indicate that only asset tangibility was statistically
significant in explaining the capital structure of the brewery industry in
Nigeria.
From
the above we can infer that although debt to equity ratio is positively related
to profitability size, asset tangibility and the growth rate of the brewery
industry in Nigeria, the size of the effect(s) is minimal. Hence, conclude that
except for asset tangibility, the above variables as posited in literature
cannot be relied on to explain the capital structure of the brewery industry in
Nigeria.
REFERENCES
Attiya,
Y. J., & Qaisar, I. (2012). A decomposition analysis of capital structure:
evidence from Pakistan’s manufacturing sector. The Lahore Journal of
Economics 17:1: pp. 1–31
Bauer,
P. (2004). Determinants of capital structure: empirical evidence from the Czech
Republic. Czech Journal of Economics and
Finance, 54, 2004, ã. 1-2
Fama,
E. F., & French, K. R. (2002). Testing tradeoff and pecking order
predictions about dividends and debt. Review
of Financial Studies, 15(1), 1–33.
Gajurel,
D. P. (2005). Capital Structure
Management in Nepalese Enterprises (Master’s Degree Thesis) Kathmandu:
Faculty of Management, Tribhuvan University.
Ibrahim,
E. E. (2009). The Impact of Capita-structure choice on firm Performance:
Empirical evidence from Egypt. The
Journal of Risk Finance, vol. 10, No.5, pp 477-487
Ishaya,
L. C., Sannomo, L. G. & Abu, S. O. (2013) Determinants of Capital Structure
in the Nigerian Chemical and Paints Sector. International
Journal of Humanities and Social Science, Vol. 3 No. 15; August 2013.
Myers,
S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147–175.
Myers,
S. C., & Majluf, N. (1984). Corporate financing and investment decisions
when firms have information investors do not have. Journal of Financial Economics, 13(2), 187–22
Myers, S.C. (2001). Capital Structure. Journal of Economic Perspective, Vol.
15, pp. 81-102.
Smith,
C. W., & Warner, J. B. (1979). On financial contracting: An analysis of
bond covenants. Journal of Financial
Economics, 7, 117–161.
Stulz,
R., (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, Vol.26,
pp.3-27.
For
comments, observation or other feedback or if you need assistance with your
research projects/papers, you can contact the author via E-mail:
researchmidas@gmail.com or call/Whatsapp (+234)0803-544-6622
No comments:
Post a Comment