ABSTRACT
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 maturity have a positive impact on the dependent variable debt maturity with values 0.065 and 0.559 respectively; also, firm’s leverage and firm’s credit quality have 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.
INTRODUCTION
1.1 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.
1.2 STATEMENT OF PROBLEM
Despite the importance of the debt maturity choice, financial economists have been largely silent about what actually affects firm’s ability and desire to borrow for different periods of time. Barclay (1995) shows that firms with high growth opportunities have less long term debt, they also found out that larger firms with good crediting ratings have more of long term debt. Barclay and Smith’s results
support Myer’s (1977) view that firms with high potential agency costs of debt
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borrow more. Morris (1991) examines 140 companies in 1985, and found that the weighted average maturity of debt obligations is positively related to firm size, financial leverage, liquidity and asset maturity. He argues that firms match maturity in order to avoid the cost of financial distress which arises when refunding shorter term debt obligations. Titman and Wessels (1988) found that smaller firms are likely to issue short term debt.
These unresolved issues necessitate a detailed investigation of the determinant of debt maturity in selected Nigerian firms. No doubt a resolution and understanding of the detail would assist companies in planning their capital structure for optimal results.
1.3 OBJECTIVES OF THE STUDY
Cooper and Emory (1995) remark that research objective addresses the purposes of investigation. The general objective of the study identify is to the determinant of debt maturity. The specific objectives of the study are as follows:
1 To ascertain the relationship between firm’s size and debt maturity.
2 To determine the relationship between firm’s leverage and debt maturity.
3 To establish the relationship between firm’s asset maturity and debt maturity.
4 To establish the relationship between firm’s credit quality and debt maturity
1.4 RESEARCH QUESTIONS
Based on the research objectives above, the following research questions provided firm templates for achieving the objective of the study.
1 What is the nature of the relationship between firm’s size and debt maturity?
2 How does firms leverage relate to debt maturity?
3 How does firm’s asset maturity relate to debt maturity?
4 In what ways does firm’s credit quality affect debt maturity?
1.5 HYPOTHESES
Van Minden (1986) defines hypothesis as a clear and concise assumption, formulated in a manner that can be tested. Hypothesis is relevant where it is cogent that a statistical test must be used in answering the research question (Aneke
1998). The following hypotheses were tested in the study:
1 Firm’s size is not a significant variable in estimating the expected value of debt maturity
2 Firm’s leverage is not a significant variable in predicting the expected value of debt maturity.
3 Firm’s asset maturity is not a significant variable in forecasting the expected value of debt maturity.
4 Firm’s credit quality is not a significant variable in assessing the expected value of debt maturity.
1.6 SIGNIFICANCE OF THE STUDY
This study will have explicit benefit to the Nigerian firms/investors (local
and foreign), and researchers. It is hoped that this research on the determinants of Debt Maturity on Nigerian firms will provide a preliminary understanding of its nature and features in third world countries. Preliminary understanding of the determination of debt maturity will guide
5 Investors on how to invest wisely and equally help firm on the management of their resources.
6 To the body of academics, the study will serve as spring board for further researches in this very important area of study.
1.7 SCOPE OF THE STUDY
As at 31st December, 2011, there were 241 listed firms in the Nigerian stock exchange. Altogether in the Nigerian stock exchange categorization of shares companies are classified into 29 sectors. In line with previous studies, financial services were eliminated from the study because of the unique nature of their balance sheet.
Though the population of the study is 241, we used purposive sampling to limit our study to eight firms that had debt capital in their structure as at 31st December 2008, and for which we have sufficient data. The time frame is from 2007 – 2011, a five year period.
The names of the firms selected are given below. The reasons for the elimination of other companies were outlined in Chapter 3.
AFPRINT NIGERIA PLC
ELLAH LAKES PLC
PRESCO PLC
GUINESS NIGERIA PLC
NIGERIAN AVIATION HANDLING COMPANY PLC
AIRLINES SERVICES AND LOGISTICS PLC
TRIPPLE GEE AND COMPANY PLC
NIGERIAN BREWERIES PLC
1.8 LMITATIONS OF THE STUDY
The conduct of research in Nigeria is imbued with lots of problems. Resource constraints constituted the first major limitation of this study. Collecting five years reports of the firms used as a case study involved extensive travelling around the country, which invariably implied huge cost outlay. Getting the respective annual reports of the firms for five year time – frame posed serious difficulties given the habit of preservation of documents and material in the country. Some of the firm’s archived reports have been destroyed or lost.
The data are therefore limited in temporal scope of five years. However, efforts were made to overcome these threatening factors to justify the objective of this study
REFERENCES
Aneke, O. E. (1998) Introduction to Academic Research Methods, Enugu: Gostak Printing and Pub. Co. Ltd.
Barclay, M. J. and C. W. Smith, (1995) ‘The Maturity Structure of Corporate
Debt’, Journal of Finance, 50, 609-631.
Cooper D, and C Emory, (1995) Business Research Method,
5th Editon U.S.A.Irwin, Inc.
Morris, J.R. (1989) Factors Affecting the Maturity Structure of Corporate Debt Money Paper, Graduate School of Business, University of Colorado at Denver.
Myers, S. (1977) ‘Determinants of corporate Borrowing,’ Journal of financial Economics. Vol 5, pp 147 – 175
Titman, S. and R. Wessel, (1988) ‘The determinants of Capital Structure Choice’
Journal of Finance, 431-519.
Van. Minden, J.R.J. (1986) Dictionary of Marketing Research, Chicago and London: St. James Press.
This material content is developed to serve as a GUIDE for students to conduct academic research
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