THE DETERMINANT OF DEBT MATURITY IN SELECTED NIGERIAN FIRMS
ABSTRACT
The study 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 utilized 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.
CHAPTER ONE
1.0 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 firm’s 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 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:
- To ascertain the relationship between firm’s size and debt maturity.
- To determine the relationship between firm’s leverage and debt maturity.
- To establish the relationship between firm’s asset maturity and debt maturity.
- 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 the templates for
achieving the objective of the study.
- What is the nature of the relationship between firm’s size and debt maturity?
- How does firms leverage relate to debt maturity?
- How does firm’s asset maturity relate to debt maturity?
- 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:
-
- Firm’s size is not a significant variable in estimating the expected value of debt maturity
- Firm’s leverage is not a significant variable in predicting the expected value of debt maturity.
- Firm’s asset maturity is not a significant variable in forecasting the expected value of debt maturity.
- 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 Investors on how to invest
wisely and equally help firm on the management of their resources. 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 LIMITATIONS 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.
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