Debt And Equity Position

Published Date: 02 Nov 2017

INTRODUCTION

1.1 Background of the Study

Capital structure decision is the most essential element of every business organization and requires proper evaluation and selection processes. This is because the survival of every business entity depends on the selection of appropriate debt and equity position that maximizes shareholders wealth.

There are a few empirical evidences from a few emerging economies (there are also empirical evidence from developed economies) to show that an economy’s performance and stability depends on its business market and services. However, without adequate finance, incentive of operations (profit), a tolerable business environment, an effective management and operations structure, a growth-oriented government policies and regulations, firms will under-perform.

Maksimovic (2001), defines capital structure as a long-term source of funds which is in the form of either equity (reserve and/ surplus) or debt rating credits for the firm.

The choice of debt and equity position by business entities has called for several studies to be done on the subject matter and this has led to the discovery numerous theories surrounding capital structure. Modigliani and Miller (1958) is one such theory. However, the dominant theories in use explaining the financing decisions of firms are the Trade-off theory and Perking order theory. However, most researchers conclude that the 'irrelevance proposition' that M& M outlines is not that simple. Uwalomwa (2012); Scanlon (1972); Popsescu (2009), show that the nature and objectives of a business, makes capital structure theories subject to interpretation.

This implies that theories in use explaining the financing decisions of firms like the Trade-off theory and Perking order theory may appear the preferred for most firms but it does not make it the optimal theory. For instance, M&M (1958) capital structure theory suggest that outside influences and/ other determinants affecting the growth and value of a firm is irrelevant.

However, Ogbulu (2012) state that ignoring these outside influences on a firm could be interpreted as if capital structure decisions of firms based on the 'irrelevance proposition' exist in a perfect world. Thus, making such a world of business perfect where taxation, debts equity, high debt ratings, risks of bankruptcy and financial crisis irrelevant.

It could therefore, be deducted based on Ogbulu (2012) suggestions that if the irrelevant determinants that affect the capital structure decisions of firms are evaluated, said 'irrelevance' should be considered in the real world as relevant. Thus, bankruptcy cost, profit from tax credit etc. become relevant to capital structure decisions of firms. In effect, capital structure decisions of firms are relevant because they affect firm leverage and influence market value (Collins, 2012).

1.2 Problem Statement

The current dynamic nature of business environment has made it challenging for managers in making strategic financial decisions especially in Africa where financial market that is not much developed as compared to other developed markets. The immaturity of the market makes it difficult for financial managers to make certain financial decisions that will increase the value of the firm. The capital structure selection by financial managers of the firm has a strong impact on the general wellbeing of the firm and also affects the future activities of the firm in general. This study is meant to analyses the capital structure policies of companies listed on the Nigeria Stock Exchange taking a case study of bottling companies, hence the topic analysis of the capital structure policies of companies listed on the Nigeria Stock Exchange: A case study of bottling companies.

The capital structure of a firm may vary depending on the management decisions with respect to the treatment of equity (Both preferred and common) and debt ownership of the organization. The working capital policy adopted by managers whether to use aggressive, conservative or moderate policy should therefore be analysed. The two main basic sources that a business need in investing in its assets are debt and equity sources which need to be compensated for the use of their capital with debt requiring interest and equity requiring dividend (Tracy, 2002). Management should therefore be circumspect in planning and designing the capital composition of a company by looking at all essential factors critically since it is necessary in predicting the well-being of the company. This brings into the concept and thought of optimal capital structure.

Determining the optimal capital of a company is not a simple decision and it is very critical for most organization. Optimal capital structure decision has a great impact on the returns of the organization and competitors in general. According to Tracy 2002, ‘a perpetual question that is not easy to answer concerns whether a business is using optimal or best capital structure’. Vessey, et al. (2006), state that ‘A company’s target or optimal capital structure is the mix of debt, preferred equity and common equity in its balance sheet that will maximize the company’s stock price’. This implies there are some evidences of optimal capital structure but to determine the optimal capital structure for a particular company may be difficult.

1.3 Background of Samples NSE Firms

According to Catherine Dawson (2005), what makes a research differ from any non-research activities is the process by which answers are acquired. That is, the process to find an answer to a question in a research-oriented study is that the process is guided by marked parameters.

Therefore, in the process of finding answers to the posed question; "Analysis of the capital structure policies of companies listed on the Nigerian Stock Exchange: A case study of bottling companies", there was a process followed. One of the criteria of the process was to select companies on the Nigeria Stock Exchange, which falls within the parameters of the set task. The sampled firms were selected based on their being members or listed on the Nigeria Stock Exchange and that they are a bottling company with its main operations in Nigeria. The companies selected are The Dangote Group, A. G. Leventis (Nigeria) Plc., PZ Cussons and Nigerian Breweries Plc. These four companies were selected out of the rest of the bottling companies listed on the Nigeria Stock Exchange because of their performance on the market.

The Dangote Group was initially a trading business started by Alhaji Aliko Dangote in 1981, on his return to Nigeria after graduating from business studies in a university in Egypt in 1978. The trading company dealt in rice, sugar and cement before launching into full-scale manufacturing. The company has become a diversified business dealing in the manufacturing of cement, sugar and flour refineries, pasta and noodles manufacturing, poly products manufacturing, logistics (port management and haulage) and real estate. This was prompted by a visit to Brazil in 1999, to study the emerging manufacturing sector.

The vision of the Dangote group is to promote the standard of living of the populace and earning high yields on the returns of their stakeholders. The core value of the Dangote group which they share with their stockholders are to provide customers with services that reflect the firms integrity and care for the community they operate from by learning new procedures that is good for the wellbeing of the community and the business. That is, developing the firm by seeking innovative methods to retain their market leadership.

Dangote is focused on cost leadership by promoting the efficiency of its human capital. It aims to provide local value added products and services that "meet the basic needs of the population" one of which is creating job opportunities for the labour market.

Nigerian Breweries Plc. was incorporated in 1946. It is a company which produces alcoholic (larger beer, star beer, beer stout) and non-alcoholic (maltina, malta, climax energy drink, fayrouz etc.) beverages in Nigeria, West Africa (five operational plants). It current owners are Heineken Brouwerijen B. V. with 37.74% of the company's shares, Distilled Trading International B. V. with 16.36% of the company's shares and the stakeholders of the company (Nigerian citizens) owning 45.9% of the company's shares.

Chief Kolawole B. Jamodu is the current chairman appointed to the post in March 2006, becoming the chairman of the board of directors of Nigerian Breweries Plc. in January 2008. He is a qualified chartered account and a former minister of industries of the Federal Republic of Nigeria.

Nigerian Breweries Plc. Aims to be the leading beverages company in Nigeria producing quality products for customer satisfaction through environmentally sound operations. The company's core value, which it shares with its stockholders, is to become a global name in the beverages market by promoting the personal developments of their employees and supporting the community and the environment through their corporate structure responsibilities. Thus, incorporating CSR activities, to promote high performance in the market to earn profit on the returns for their stakeholders by producing quality products that their customers enjoy (customer satisfaction).

The third sampled company, PZ Cussons was a trading post in Sierra Leone in 1879, then name Paterson Zochonis (PZ) after its founders. George Paterson and George Zochonis, the founders, opened a branch in Nigeria in 1899. In 1975, it acquired Cussons Group Ltd and the name was changed to PZ Cussons and in 2007, the Nigerian branch of PZ Cussons was changed to PZ Cussons Nigeria Plc.

PZ Cussons is an international company operating in Nigeria with a mission to enhance the lives of consumers through their innovative production of quality products (value for money). The aim of PZ Cussons is to perform in the global market and become a market leader by producing quality products, provide a means of growth for their employees that enhance their quality of life and gaining profit for their stakeholders.

PZ Cussons products include health and wellbeing products; brand name Carex, that is, antiseptic soaps; brand name Robb, that is, ointments such as rubb original, for pain and nasal congestion relief and inhalers; brand name every day, which comprises of feminine hygiene sanitary products; brand name Joy (joy roll-on, joy cologne, joy talc and joy lip-gloss). It health and beauty products include dairy products such as evaporated and powdered milk, beauty products; brand name Venus― a product line including shampoo, hair relaxer, hair conditioner and hair growth creams (products specific for African hair types). It detergent products include toilet soaps; brand name premier and imperial leather.

The fourth selected firm is A. G. Leventis. In 1920, Anastassios G. Leventis, from Cyprus was engaged by a trading company based in Nigeria. He left his employers to establish a trading company of his own in 1937, and was later joined by his younger brother, C. P. Leventis in his business venture. They initially exported agricultural products, import and sale of textiles and other commodities. The beginning of the 1950's, saw them branch into retails stores. They also became an agent for Mercedes Benz cars and trucks ( including assembly, sale and after sales care), manufacturing and distribution of coca cola products throughout Nigeria, the assembly and distribution of air-conditioners, the sale and servicing of refrigerators and generators (a joint venture it shares with Cummins West Africa ltd and Cummins Inc., USA). Another business venture of the Leventis group during this period was to branch into the manufacturing of crown and plastic containers for the beverage industry.

In the 70's, the group started expanding their operations beyond Nigerian borders. It currently employees more than ten thousand people directly and indirectly, two hundred thousand people. It current market activities include three food processing factories and approximately two hundred and fifty residential and commercial properties in real estate development and management. It also has a sales and servicing sector, overseeing vehicles (Volkswagen brand of trucks and buses from brazil and Mercedes Benz cars). This includes an engine overhaul and rebuild department. Another of the Leventis group ventures is in the hospitality sector with a hotel located in the mainland of Lagos. This means that the Leventis company in Nigeria has an annual sales turnover of approximately one hundred and thirty billion Nairas, and has invested about one hundred billion Naira in Nigeria in the last five years.

Thus, the four sampled firms fulfill a criteria in the parameters of the model and/ process in answering the question of the impact of capital structure policies on Nigerian bottling firms listed on the Nigeria Stock Exchange.

1.4 Aim and Objectives of the Study

This study yearns to find out and investigate into how a company’s value and profitability is affected by its financial decisions taking into consideration selected companies on the Nigerian stock exchange. It seeks to identify the capital structure of the selected companies and analyze how selected capital structure impacts on the value of the selected company.

The following are the specific objectives this research intends to achieve

Review gearing ratio for selected companies for the period 2009-2011

Ascertain the impact capital structure has on the profitability of selected companies

Examine the effects selected capital structure has on the value of selected companies

To achieve the above aims and objectives, the research question outlined below will guide the researcher

What are gearing ratios for the selected companies for the period 2009-2011?

What impact does capital structure has on profitability and the value of the selected companies in general?

1.5 Significance of the Study

The capital structure selected by the company plays a major role in determining the general health of the company. It is a financing strategy that controls the general well-being of the company.

This study aims at discussing how selected capital structure of selected companies on the Nigerian stock exchange which implies the study will be of benefit for several parties and stake holders in general. Financial managers can make informed decisions with regards to capital structure selection and will know in detail the debt to equity ratio that maximizes shareholders wealth.

This study therefore provides fruitful guidance towards how companies in the Nigerian stock exchange should select their capital structure with respect to meeting its objectives and meeting investors wants.

This research may also serve as a reference point for further research in capital structure composition relative issues.

1.6 Scope and Limitations of the Study

This research is limited to only companies listed on the Nigerian Stock Exchange and takes a special focus on the manufacturing companies. This implies the results of this study cannot be used when dealing with companies from other sectors such as the technology sector, banking sector and the energy sector. It will be unusual therefore to use this study to generalize other sectors.

Time is also a major element in limiting the outcome of this study. Considering the time necessary for submission, the researcher did not have enough time to pull things together to the best advantage of the study, but the objectives of the study will be accomplished.

1.7 Structure of the Study

Chapter one of the study entails the introduction, statement of the problem and research objectives. It also highlighted the significance, the scope and structure of the study.Chapter Two provides the literature review, which would comprise of empirical and theoretical literature. It would review and criticize works of authorities on the subject, definitional issues, concept, and theories.

Chapter three comprises of the methodology, with emphasis on the population, sampling methods, data collection instruments and data handling used answer the research questions. It also highlights research approach, philosophy, validity and generalizability.

Findings and results will be done at Chapter four. This will be done in relation with data collected through the primary and secondary data collection method. Attempt to interpret the findings in Chapter four are made in chapter five in relation to research questions and objectives.

Chapter Five summarizes and concludes the study, with some relevant recommendations, suggestions and a summary of the study.

Chapter 2

LITERATURE REVIEW

2.0 Introduction

This chapter takes critical assessment of relevant literatures on the research theme with respect to the various capital structure theories. It starts with explaination to various theories of capital structure proceeds with selection of relevant academic materials related to this subject matter.

2.3 Capital Structure and Theories of Capital Structure

The capital structure of a firm may vary depending on the management decisions with respect to the treatment of equity (Both preferred and common) and debt ownership of the organization. The working capital policy adopted by managers whether to use aggressive, conservative or moderate policy should therefore be analyzed. The two main basic sources that a business need in investing in its assets are debt and equity sources which need to be compensated for the use of their capital with debt requiring interest and equity requiring dividend (Tracy, 2002). Management should therefore be circumspect in planning and designing the capital composition of a company by looking at all essential factors critically since it is necessary in predicting the well-being of the company. This brings into the concept and thought of optimal capital structure.

Determining the optimal capital of a company is not a simple decision and it is very critical for most organization. Optimal capital structure decision has a great impact on the returns of the organization and competitors in general. According to Tracy 2002, ‘a perpetual question that is not easy to answer concerns whether a business is using optimal or best capital structure’. Vessey, et al. (2006), state that ‘A company’s target or optimal capital structure is the mix of debt, preferred equity and common equity in its balance sheet that capital structure but to determine the optimal capital structure for a particular company may be difficult.

There are more than few theories on the subject of optimal capital structure and concerning its existence. The main selected theories that will be discussed with respect to optimal capital structure of a company are the net income approach, traditional theory, the Modigliani-Miller theory (MM), the Pecking Order theory, and the trade-off theory (Brealey & Myers, 2003). There are other theories such as net operating income (NOI) theory and the likes, but this paper will be limited to the above mentioned theories. Unless stated otherwise, explanation to the various theories are based on some basic assumptions given that the financing of the company remain constant, there is no change of the total assets of the company, constant business risk overtime, no existence of corporate tax, there is no finite life for the company, the market is efficient for all investors, there is no growth in operating profits and 100% dividend pay-out ratio (Brealey & Myers, 2003).

The net incomes theory was suggested by Durand and presumes that in relation to capital structure, cost of equity and cost of debt are independent (Kapil, 2011). Therefore, the firm maximizes value with more debt (Kapil, 2011). With the Net income theory, optimal capital structure is achieved when the company uses more debt and if possible 100% debts.

The traditional theory also developed by Durand presumes that the weighted average cost of capital decreases to a particular stage and rises as the company uses more debt (Lee, et al., 2009). The theory implies capital structure will be at its optimal where weighted average cost of capital is at its minimum (Lee, et al., 2009). Therefore if a company uses its debt professionally and efficiently, there is a high probability of creating value thereby reaching optimal capital structure.

The Modigliani-Miller theory has a generally different approach as compared to the above explained theories by Durand (Brealey & Myers, 2003). This theory has two main propositions. According to Modigliani-Miller proposition I, capital structure is independent to the value of the firm. Therefore the value of a company is not affected by the company’s capital structure. With nonexistence of taxes and also with the already given assumptions, shareholders from both leverage firm and unlevered firm receives the earnings of return having the same risk. This implies there is the practice of financial arbitrage because investors can buy under-priced shares by selling overpriced shares until the both variables reach equilibrium and are equal. Also, the value of a levered firm must be equal to the value of an unlevered firm. Modigliani-Miller proposition II the cost of equity for a levered firm equals the constant overall cost of capital plus a risk premium that equals the spread between the overall cost of capital and the cost of debt multiplied by the company’s debt to equity ratio (Bhat, 2008). This implies that higher debt to equity ratio leads to higher expected return on equity. (RE=RA+(RA-RD)(D/E))

Modigliani and Miller now decided to treat tax in their theory which brings into existence Modigliani and Miller Proposition I-II with taxes (Brealey & Myers, 2003). The new proposition presupposes that there is an important advantage debt enjoys as compared to equity (Brealey & Myers, 2003). This is because interest on debt is tax deductible whereas dividend payment and retained earnings are not tax deductible. It is therefore important for a company to consider debt financing than equity financing. Modigliani and Miller displayed that with the inclusion of corporate tax, both levered and unlevered firm has the same value plus the present value of tax shields associated with debt. By ignoring agency and bankruptcy cost, the firm is likely to always borrow debt for the foreseeable future in order to use tax shield (Brealey & Myers, 2003).

The pecking order theory is a non-classical theory which tries to solve the existence of optimal capital structure be explaining management decisions regarding optimal capital structure with respect to retained earnings, debt and share capital. With this theory, business tends to finance their activities in the sequence of retained profit, debt and equity share issue. (McLaney, 2009)

According to Sawant (2010), the trade-off theory of capital structure is based on the trade-offs between the benefits and cost of debt. The theory predicts that firms will borrow till the marginal value of tax shield from additional debt equals the increase in the present value of cost from financial distress (Sawant, 2010). Therefore, the company decides to choose depeding on current and predicted future conditions how much equity finance and debt finance the company requires by balancing their cost and benefits with respect to the usage of any of the source of finance (Chen, 2012).

2.1 Selection of Related Materials on the Subject Matter

The selection of literature to include in the review has been undertaken with various factors in mind. The search on the proposed research topic was carried out using electronic databases such as www.emerald.com, questia.com and the World Wide Web. The key words and combinations of the key words helped to focus the search for the relevant items: capital structure, taxation, Nigerian Stock Exchange, Africa, capital structure theories, equity, investment, capital structure policies, Nigerian business policies (government).

The criteria for selection were done by reviewing the themes of the selected papers, weighing them on relevance to proposed research objectives; (to outline how the various capital structure theories influence the capital structure decision making of these firms. It is also to outline the determinants of capital structure in an emerging economy such as Nigeria). Twenty papers were selected as fulfilling the criteria.

The economy is made of goods and services that fulfil a need in the community. The firms responsible for meeting the consumer market needs require capital in order to maintain its productivity. Therefore, to meet the objectives of a firm there is the need for a capital structure that supports growth and firm value. In 2011, Sangosanya, Awoyemi, carried out a study to identify factors that determines the growth of manufacturing firms listed on the Nigeria Stock Exchange during the period (1989-2008).

Sangosanya (2011) reviewed and analysed the motives for the sampled firms' establishment, using empirical data to outline the determinants for firm growth. In addition, he reviewed capital structure theoretical models, adjusting them for specification to fit the perimeters of his research aims. The conclusion was that existing theories support the need for a capital structure. However, the findings implied that there are many complex entities, which influence capital structure decisions of firms. The evidence suggests that the nature and behaviour of a particular firm determines its growth and performance. That is, the firm value is determined in part by the firm's organisational cultural practices and their capital structure policies.

Sangosanya (2011) outlines some of the existing theories in practice to support his assertions of dynamics involved in the growth of a firm and its value (trade-off, Meyers (1984). Theoretical models such as the coarsian theory, state that transaction cost is a determinant of firm growth although it is not clear-cut. It is possible that his assertion considers other variables for firm growth and not solely on the strength of transactions carried out.

The neo-classical theory theorises that the main objective of a firm is to generate profit for its stakeholders. This implies, considering only the bottom-line by reducing expenditure cost and promoting profit. The managerial theory outlines external factors as determining firm value and growth (William, 1959). It advocates generating revenue through personnel.

For instance, the bell system financial policies, according to Scanlon, John (1972), describe a system that incorporates evidence of past financing decisions based on the nature of the firm. Since the nature of the firm is such that it product is unique with a high demand on the market, its financial capital source was external. Therefore, apart from adopting capital structure policies that promotes flexibility, it also developed it personnel base on specific skills to generate an external fund base.

The implication therefore is that unlike M&M (1958) proposition of 'irrelevance ', a firm would have a better advantage of surviving an unpredictable market if it invests in its management team. The link between management and the practices of a business' capital structure is alliterated through the selected literature.

As much as the models of capital structure theories in practice advocate the advantages of a business adopting a particular one, some researcher (Uwalomwa, U et al, 2012; Crnigoj, 2009, Eldomiaty, 2008) outlined the fact that there are indeed, many variables that impact on firms' capital structure decision-making. This implies that although the existing theories form the basis for most firm choices as to which best support their objectives, the influences of the human condition cannot be taken out of the equation. However, this awareness does not preclude the evidences gathered by researchers that there is a need for each business to have capital structure theory.

Although the debates goes on as to which is the optimal theory, the symbiosis between capital structure and firm value has been extensively researched (Brounen & Eichholtz, 2001: Shao, 1995; Collins et al, 2012). The evidence shows that the capital structure policy of a firm is linked to its market value. Therefore, since the capital structure policy affect a firm's value, it is best for a firm to choose one that maximises its market value. However, researchers agree that there are many determinants that characterises a firm's capital structure (Ogbulu et al, 2012; Beattie, 2006)

Musa, Fodio (2009), determined five variables (current earnings, previous dividend, cash flow, investment and net current assets) have significant impact. The findings from other research support these assertions of determinants that characterises capital structure policy. For example, Hamidizadeh (2011) designed an eighth dimensional model capital structure and concluded that determinants such as firm size, age, taxation and debt ratio affect leverage. The determinants mentioned all have a role to play in determining the value of a firm. For instance, the size of the firm means that more capital is needed to carry out the daily productive functions of the firm.

The trade-off theory advocates that a firm's capital source should be a debt and equity balancing to advance the firm's market value. However, as much this system allows for a cash flow source, it carries with it a high risk in light of the changes in the market. Ogbulu (2012) states that in an emerging market such as Nigeria, equity capital, a component of capital structure is irrelevant to firm value. He advocates that in such an emerging market, long-term debt should be the main determinant of a firm's value. However, Salawu (2012) found that higher income variability increases the risk to firms. This is because whether a firm's source of funding is dependent on short-term debt or long-term debt, it is difficult to cover the interest attached to such borrowing in times of financial distress.

However, the issue with this recommendation is that in an emerging economy such as Nigeria, although firms in emerging economies practice current theories of capital structure, researchers find that they are hindered from gathering it impact on firms because of lack of data (Miller, R., 1994; Adesola, 2009; Salawu, 2012).

The twenty selected materials all reiterate the point that capital structure decision, impact on firm growth and firm value. However, they have in common the controversy, which has existed amongst economist as to which capital structure theory is best for firms in order for them to meet their aims and increase in market value. Adeyemi (2011), state that the perceived relationship between corporate capital structure and firm value in Nigeria is valid. For the purposes of the proposed research, the selected materials have in common the research aims and objectives to find out how the theories of capital structure fare outside matured economies. For example, Popsescu (2012) reviewed the capital structure theories and concluded that clearly, money matters when it comes to running a business.

It is therefore, obvious that all the current theories outline a means of acquiring the financing that is needed. It becomes obvious then, that these theories are subject to interpretation. It is also clear that the factors that bear on the success of a theory are not subject to a specific market.

He recommends that for those emerging market such as the Nigerian economy, the chances for growth of the market and by association, a firm, could be considerably increased if unquoted firms are encouraged to access the capital market. In order for them to accomplish this, the exorbitant charges levied at firms looking to be listed, could be reduced. Regulators could implement a system that allows for subsidising flotation cost.

Each of these researches emphasises the fact that each of the theories put forth a means to attain benefit and accepted cost by looking for alternative financial strategies. Crnigoj (2009) researched into how changes in an economic system and corporate governance affect capital structure. The implication was that for such an emerging market is not so much characterised by the capital structure it employs as by employee-governed behaviour.

Adeyemi (2010) provides evidence in his research examining the state of audit, governance structures and firm characteristics. There is evidence that ownership by non-executive director make a difference in the quality of the firm's audit. The common weakness faced by researchers in their attempt to discover how practices of existing capital structure policies in emerging markets such as Nigeria encounter is the lack of empirical data (Salawu, 2012; Adesola, 2009; Kolapo, 2012).

2.2 Identified Capital Structure Determinants in the Sampled NSE Firms

The current school of thought regarding capital structure theories highlights the fact that its influence on the performance of a firm is not limited to the type in practice (Musa (2009); Hamidizadeh (2011); Shao (1995). Current research on the subject have identified characteristics of capital structure theory in practice that provides an insight into what makes a capital structure effective to achieve the aims and objectives of a firm.

In 2009, Musa Fodio's empirical analysis of capital financing policies of quoted firms on the Nigeria Stock Exchange outlined five variables that characterises firm performance (net income, previous dividends, cash flow, investment and net current assets). The outcome therefore, implies that, it is not the capital structure theory in practice alone that determines performance and the market value of a firm. The attitude of management on generating operating capital (Scanlon, 1972) and how they factor into their capital decision-making, performance history and every internal variables (net current assets, investment), have a significant impact on firm growth and value.

The common determinants such as taxation, firm size, equity, leverage, tangibility of assets appear to have significant impact of firm growth and value no matter where the business is established (Crnigoj, 2009). Thus, whether in an emerging market or a matured market, the only difference to the impact of these capital structure determinants; the extent of their effect on a firm's performance on the market and its subsequent value on the market, is the behaviour of its employees and/ management.

Therefore, whichever capital structure theory is influencing the capital structure policies of a firm, it the behaviour of capital decision-makers within the firm that determines the success or failure of the capital structure theory in practice. The success of the firm in terms of performance, growth and value would be characterised by the understanding and appropriate use of the various components. For instance, Popsescu (2009) state that, for the success of a firm, a firm should assess existing capital structure theories, in order to choose the one, which is most suitable for a firm's needs.

Beattie (2006) outlines that most firms' objectives are to maintain a source of capital financing that would sustain firm's operations and generate dividends. Hence, most firms rely on maintaining a 'target debt level' to achieve this objective. Therefore, firms use the capital structure theory (Pecking order theory, trade-off theory etc.) a combination or combinations of whichever theory that suites the nature of the firm. However, the benefits of these theories for a firm appear to be optimal practices of its characteristics (Eldomiaty, 2008).

Therefore, a determinant such as leverage based on tangibility of asset should be at the core of a firm's long and short term debts financing (Collins, 2012). Therefore, the negative effect of high debt credit ratio is minimized in the event of corporate finance crisis. Hence, the debt behaviour of a firm could be managed through its debt and net income history, through monitoring of its stock market prices and by maintaining a cash flow behaviour that guards against any negative effects of debt financing (Brounen (2001); Scanlon (1972).

A number of empirical studies have identified firm-level characteristics that affect the capital structure of firms. According to Fattouh et al (2008), cross sectional models with four variables: firm size, assets tangibility, profitability and growth opportunities are considered standard among the tests of capital structure theories. Among these determinants are; Age of the firm, Firm size, Asset structure, Profitability, Firm growth opportunities, Taxation.

The age of a firm is the standard measure of its reputation in capital structure models. As a firm continues longer in business, it establishes itself as an on-going business and therefore increases its capacity to take on more debt. Hence, age is more positively related to debt (Abor, 2008). For instance, the four selected companies quoted on the Nigeria Stock Exchange made the criteria for selection due to their age. Thus, the date the business was established and when they became listed on the NSE. The Nigerian Breweries Plc. was incorporated on the 16th of November 1946 and was listed on the NSE in 1973 (39 yrs.). The Dangote Group (established in 1981), have four of their subsidiary companies listed on the Nigeria Stock Exchange. National Salt Company of Nigeria Plc. was listed on the NSE IN 1991 (21yrs), Dangote Flour Mills Plc. was listed on the NSE in 2008 (4yrs), Dangote Sugar Refinery Plc. was quoted on the NSE in 2008 (4yrs) and Dangote Cement Plc., 2010 (2yrs). Pz Cussons Nigeria Plc. on the other hand was established in 1899 and became a quoted firm on the Nigeria Stock Exchange in 1974. A. G. Leventis, which opened its doors in Nigeria in 1937, became a member of the Nigeria Stock Exchange in 1978.

Thus, these companies have existed this long in an emerging market and faced global economic crisis but not only survived but from the analysis of their financial reports, appear to have maintained their high performance on the market and earn profits. This supports Sangosanya (2011) statement that the core of what determines a firm's growth could be attributed to its behaviour and performance, which is enshrined in its organizational cultural practices. Therefore, through the analysis of the capital structure theories of these firms, one outcome is that the growth the company experienced despite the challenges they faced because of the global market crisis, there is a pattern of behaviour, which appears to have sustained them.

The size of the firm as a determinant is outlined by researchers (Hamidizadeh, 2011; Musa, 2009) as the bigger the firm, the more easily it has access to capital markets and can borrow at more favourable interest rate, therefore, promoting growth.

For instance, Dangote Group is a diversified business involved in manufacturing, logistics, packaging, distribution, real estate and importing. It has four of their subsidiary companies―Dangote Flour Mills Plc., Dangote Sugar Refinery Plc., Dangote Cement Plc. and National Salt Company of Nigeria. In 2009, the subsidiaries of Dangote Group contributed a N19.5 billion to the turnover of the group. In 2010, because of the large size of the firm with all subsidiaries contributing to the groups turnover, the company was able to absorb the N2 billion loss incurred by Dangote Noodles Ltd. The company managed despite this, to make pre-tax profit of N4.91 billion at the end of the 2010 financial year. According to the chairperson's statement for 2010, the company was able to maintain growth through "continuous efforts in growing economies of scales".

Thus, Dangote followed it policy of expansion to generate capital. In the course of the three financial years analysed, Dangote Group made some acquisitions; Dangote Sugar Refinery Plc. Savannah Sugar Company Limited, Dangote Flour Mills Plc. exported its products beyond Nigerian borders to Chad, Cameroon, Senegal and Liberia.

Nigerian Breweries Plc. acquired Sona Systems Associates Business Management Limited (breweries locations in Ota, Ogun State and Kudenda, Kaduna State) and Life Breweries Company Limited (breweries in Onitsha and Anambra State). The acquisition of these two companies added three new brands of beverages to their existing list; Goldberg lager beer, Life Continental lager beer and Malta Gold.

Scanlon (1972), states that capital structure of a firm must be structured to accommodate all eventualities beyond management control. The firm must consider its nature so that it could adjust for the periods of market climate changes thereby maintaining an in-flow of employed financial techniques and getting their level of earnings up. A. G. Leventis Nigeria Plc. has three food processing factories under their Leventis Foods Limited. They incorporated Druckfarben Nigeria Limited in 2010 and earned a turnover of N337.66 million at the end of the 2011 financial year with a profit of N64.95 million. A. G. Leventis Nigeria Plc. at the end of the 2011 financial year revalue their investment in properties and leaseholds at N21.1 billion although the amount was not incorporated into their annual profits.

Pz Cussons Nigeria Plc. strategy for generating a capital cash flow was to carry out expansions and improvement to the operational processes. In 2009, they launched a commercial air-conditioners, expanded their CoolWorld retail stores by including three new stores in Abuja, Kano and Broad Street in Lagos. This action translated into a 28% increase in the 2009 end of year turnover. In 2010, Project Unity scheme was launched to improve and modernise Pz Cussons' business processes, counteract the effects of poor infrastructure affecting the company's factory locations' layout and their distribution network (the building of an 880, 000sq foot warehouse). In 2011, the Project Unity scheme continued with the launch of Split Air-Conditioners, new fridge models― Jumbo and Casarte, and washing machines. The benefit of the project was it strengthened Pz Cussons' position as market leaders in their field and augmented their market share price.

This makes them able to tolerate high debt ratio and have a lower risk of default than smaller firms (Adeyemi, 2010; Adesola, 2009; Ogbulu, 2012). Therefore, confirming the believed that there are economies of scale in bankruptcy cost: larger firms face lower unit cost of bankruptcy than smaller firms do (Beattie, V et al, 2006).

The degree to which the firm’s assets are tangible should result in the firm having greater liquidation value (Harris and Raviv, 1991). Bradley et al. (1984) asserts that firms that invest heavily in tangible assets also have higher financial leverage since they borrow at lower interest rates if their debt is secured with such assets. For example, A. G. Leventis defined its fixed asserts as cost and valuation less accumulated depreciation. Therefore, any asserts under finance lease with a receivable net value, is calculated with the discounted minimum lease payment at the interest rate agreed upon in the lease contract.

Therefore, a depreciated asset is calculated by writing off the cost-estimated value over the expected usefulness lifespan of the assets. The tangible assets of A. G. Leventis was therein, rated annually as 2% for leasehold land and buildings, 15% for plant and machinery, 20% for office equipment and furniture, 33â…“% for computer equipment, 25% for motor vehicles.

It is believed that debt may be more readily used if there are durable assets to serve as collateral (Wedig et al, 1998; Crnigoj, M et al, 2009). By pledging the firm’s assets as collateral, the cost associated with adverse selection and moral hazards are reduced. This will result in firms with assets that have greater liquidation value having relatively easier access to finance at lower cost, consequently, leading to higher debt or outside financing in their capital structure. It is further suggested that bank financing will depend upon whether the lending can be secured by tangible assets (Berger and Udell, 1998; Eldomiaty, T., 2008). For example, in 2009, Nigerian Breweries Plc. debtors and prepayments were as follows: trade debtors (N2, 068,271 million), other debtors (N1, 184, 688 million), advances and prepayments (N146, 853) and those due from group companies, N189, 626. The 2009 cash flow and leverage were recorded as bank and cash balances with cash at bank recorded at N8, 033, 946 and cash in hand at N6, 838 with short-term deposits of N3, 771, 542. A. G. Leventis recorded other liabilities in 2009 as bank overdrafts recorded at N502, 196. Creditors and accruals were recorded as N21, 153, 415 and payments due to group companies were recorded as N2, 634, 404 million.

The Pecking order hypothesis suggests a negative relationship between profitability and leverage. This is because firms prefer to rely first on internal generated funds to finance their investments. Titman and Wessels (1988), and Barton et al. (1989) agree that firms with high profit rates would in all probability, maintain relatively lower debt ratios since they are able to generate such funds from internal sources.

Shao (1995) state that the factors that affect a firm's financial leverage are institutional structures, taxation, political and financial risks and availability of capital. For instance, the four selected firms listed on the Nigeria Stock Exchanged reported in their end of year financial report of the continual increase in taxation of Nigerian businesses. The Dangote Group Plc. reports from 2009-2011 indicated that the firm's cost output were elevated not only from the consequences of the global market crisis. Their yearly profits were eaten into because of the cost of the provision of security for goods and services and the added cost of harassment from some government officials. The implication is that profitable firms will employ more debt since they are likely to have a high tax burden and low bankruptcy risk. Ooi (1999) argues that profitable firms are more attractive to financial institutions as lending prospects and therefore they can always take on more debt capital.

Growth opportunities represent intangible assets. Firms with high proportions of growth opportunities could find it more difficult to obtain credit because of the asset substitution effect (Bradley et al. 1984). Growth according to Hall et al. (2004) is likely to place a greater demand on internal generated funds and the firm into borrowing. Marsh (1982) who argues that firms with high growth will tend to have relatively high debt ratio supports this argument.

For example, in 2010, Dangote Flour Mills Plc. pre-tax profits fell from N5. 374 billion in 2009 to N4.91 billion. According to the financial statement for 2010, the decline of 8.6% in profit that year was due to the fact that the firm had to absorb a loss of N2 billion made by their subsidiary, Dangote Noodles Limited.

Aryeetey et al. (1994) maintain that growing SMEs appear more likely to use external finance, although it is difficult to determine whether finance induces growth or the opposite (or both). On the subject of determinants affecting firm market value, various theories examine the impact of taxes on the capital structure choice of firms. Miller, R. (2012) studied the tax effect on corporate financing decisions. He concluded that using the appropriate theory for financial decision-makings is a basis for capital structure policies. This is because the operations of the firm may obscure the effect of tax status on its capital structure. Graham (1999) concluded that in general, taxes do affect corporate financial decisions, but the magnitude of the effect is ‘‘not large’’.

For instance, according to the 2010 financial report of Dangote Flour Mills Plc., tax payment for that year was N2.72 billion which was 51% lower than tax payment of N5.56 billion in 2009 was due to "crystallization of some deferred tax liability of well over N2 billion in 2010."

The trade-off theory

The trade-off predicts the capital structure as an optimally balanced cost and benefits of debt financing (Myers, 1984). The trade-off theory introduced by Myers (1984) advocates the necessity of establishing a balance between tax savings arising from debt, decrease in agency cost and bankruptcy, and financial distress cost.

The benefits include tax shield, the reduction of free cash flow problems and other potential conflicts between managers and shareholders, whereas the costs include expected financial distress costs, costs associated with underinvestment and asset substitution problems.

The Pecking Order theory

The Pecking order theory defines a specific order that firms follow in their capital structure for investments (Myers and Majuf, 1984). These are internal, risk-free financing from retained earning first, external debt financing second and eq uity issue as the last resort. This theory was developed by Myers and Majuf (1984) and Myers (1984) and its extensions (Lucas and McDonalds 1990). It is based on the idea of asymmetric information between managers and investors. This is because there is an accession that managers withhold vital information about the firm from investors and lenders.

It predicts that firm’s financing deficits and information asymmetry are the main determinants of security issues. Therefore, firms use external financing only if internal funds are not sufficient to finance the firm’s growth opportunities and the information asymmetry cost is low (Shyam-Sunders and Myers, 1999).