A Comparative Study of Determinants of Capital Structure of Multinational and Domestic Firms in Nigeria
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Date
2023-09
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Department of Economics, College of Business and Social Sciences, Crawford University, Igbesa, Ogun State
Abstract
This study investigated the determinants of capital structure of multinational corporations (MNCs) and domestic corporations (DCs) in Nigeria. The main objective is to investigate how capital structure determinant affect multinational firms and domestic firms in Nigeria. To achieve this, fifty-three non-financial firms listed on the Nigerian Stock Exchange (NSE) over the period of 2005 to 2019 were examined. Five firm-specific factors (leverage, profitability, tangibility, age and size), four macroeconomic factors that vary over time (GDP growth rate, Interest rate, Inflation rate and exchange rate) and four foreign macroeconomic factors that vary over time but country-specific (GDP growth rate, Interest rate, Inflation rate and exchange rate) were sourced from several editions of NSE fact book, several annual reports of included firms, Central Bank of Nigeria (CBN) Statistical Bulletins and World Development Indicators. Four issues were specifically examined. The first was to determine if multinational firm\s leverage ratio differs significantly from that of domestic firms. The second issue was to investigate the effect of firm-specific factors on MNCs and DCs. The third was to determine the influence of macroeconomic factors on MNCs and DCs. Finally, the study examined the effect of home country macroeconomic factors on multinational firms only. Panel data analysis was conducted for all models using the Generalized Least Squares (GLS) technique based on period-weight and cross-section weight. The analysis was anchored on two major theories of capital structure; the dynamic trade-off theory and pecking-order theory. The result showed that leverage ratio of multinational firms differs and significantly lower than that of domestic firms. Some factors like profitability, tangibility, interest rate and size were found to be largely responsible for the difference. Based on profitability, the result further showed that domestic firms follow the theoretical prediction of trade-off theory while multinational firms follow the theoretical prediction of pecking-order theory. Interest rate and exchange rate were revealed to have similar impact on leverage ratio for both MNCs and DCs in Nigeria and are significant at per cent. In addition, the inclusion of parent-country macroeconomic factors improves the explanatory power of the model in terms higher adjusted R2. Finally, the study showed that both category of firms pursued target leverage and that both MNCs and DCs respond to deviation from target leverage at the same rate (0.29), resulting in a speed of adjustment of 3.4. Some of the major recommendations from the study is that policy makers and managers of firms should first consider the macroeconomic conditions at home and abroad before taking decision on how much debt to retain in their capital so that over exposure will not affect the firm value and eventual liquidation. In summary, the study showed that MNCs and DCs do not have the same capital structure and are influenced by firm-specific variables and macroeconomic variables differently. The government is encouraged to be aware of the effect of macroeconomic factors on leverage decision of firms and therefore should put in place policies that will make the macroeconomic conditions more favourable to MNCs and DCs financial stability.