Capital Mix Decisions and Firm Value: Empirical Evidence From Listed Nigerian Firms
Abstract: This study investigates the impact of equity and long-term debt financing on value of firms quoted on the Nigerian Stock Exchange. Static and dynamic modeling and estimations were done using causality, generalized method of moments, vector autoregression, cointegration, error correction mechanism, and fully modified least squares techniques. The results indicate that both equity and debt financing variables, or changes in them over time, uni-directionally cause or affect firm value, or its changes thereof, agreeing with the traditional relevance as against the irrelevance theorizing. There exist contemporaneous positive and significant relationship between equity and value, or changes in them, over the short time period; but a negative and insignificant relationship between debt and value. Equally, positive and significant inter-temporal relationship is found between equity and firm value, but a negative and significant relationship between debt and value. Long-run equilibrium relationships exist between the variables, such that both equity and debt financing significantly impact firm value; only that the long-run debt effects remained negative; confirming the intertemporal results. The findings amplifies the point that a judicious increased use of equity financing as opposed to long-term borrowing promotes the value of the Nigerian firms studied, contrary to the pecking order but in line with the tradeoff theorizing.
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Authors: Chinedu B. Ezirim, Ucheoma I Ezirim, Austin A. Momodu, Uchenna Elike