Determinants of Capital Structure in the Nigerian Chemical and Paints Sector

Abstract

The study assessed the determinants of capital structure in Nigerian Chemical and Paints companies listed in Nigeria, for a period of five years from 2005 to 2009. The study employed secondary data from the annual reports and the Nigerian Stock Exchange (NSE) fact books covering the study period Ordinary least square (OLS) was employed to determine whether relationship exists between leverage ratio and various independent variables in the model. The study reveals 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. It also shows that the coefficient of the two significant explanatory variables, which are tangibility and profitably 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. All in all, three out of five of the explanatory variables have significant on the dependent variable whereas the remaining two, which include profitability and tangibility are not significant. The study therefore, recommends that in carrying out their debt financing decision, Chemical and Paints, should deploy and properly measure variables like size, age, growth, profitability and tangibility of the firms.

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