DETERMINANTS OF CAPITAL STRUCTURE IN ECO BANK OF NIGERIA PLC
This study is motivated by a desire to examine the determinants of capital structure of Fidelity Bank Plc. In light of the empirical review and other discussions, a number of questions arose as to whether there is a significant relationship between size of a bank, profitability, growth, tangibility of a bank and its capital structure. Using the Ordinary Least Square (OLS) regression technique with the aid of a computer software E-view 7.0, the empirical findings revealed among other things that, there is a significant relationship between size of a bank, tangibility and its capital structure, while there is no significant relationship the profitability, growth of Fidelity bank and its capital structure. We recommend among other things that, firm should engage in projects that would yield maximum profit to the organization. Firms with high profitability tend to have more internal funding, hence the use of debt would be minimized when taking financing decisions because capital used is achieved from retained earnings.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the Study
Statement of the Problem
Objective of the Study
Scope of the Study
Significance of the Study
Limitations of the Study
Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
The Concept of Capital Structure
Capital Structure Theories
Review of Empirical Studies
Literature Review on Variables
CHAPTER THREE: RESEARCH METHODOLOGY
Population of the Study
The Sample Size
The Sampling Technique
Sources of Data
Method of Data Analysis
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
Presentation of Data
Data Analysis and Interpretation (Joint Influence of the Banks)
Test of Hypotheses
Discussion of Findings
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND CONCLUSION
Summary of Findings
BACKGROUND TO THE STUDY
The theory of capital structure and its relationship with a firm’s performance has been an issue of great concern in corporate finance and accounting literature since the seminal work of Modigliani and Miller (1958). They argue that under very restrictive assumptions of perfect capital market, investors’ homogenous expectations, tax-free economy and no transaction costs, capital structure is irrelevant in determining firm value. Their subsequent preference of purely debt financing due to tax shield in 1963 was a contradiction to traditional approaches which suggests an optimal capital structure (Modigliani and Miller, 1963). In reality, establishing an optimal capital structure is a difficult task (Shoaib, 2011). He contends that a firm may require issuing a number of securities in a mixture of debt and equity to meet an exact combination that can maximise its value and having succeeded in doing so, the firm has achieved its optimal capital structure.
Jensen and Meckling (1976) demonstrates that the amount of leverage in a firm’s capital structure affects the agency conflicts between managers and shareholders and thus, can alter manager’s behaviours and operating decisions. This position is agreed by Harris and Raviv (1991); Graham and Harvey (2001); Ebaid (2009). Since Jensen and Meckling’s argument regarding capital structure influence on firm performance, several researchers have followed this extension and have conducted studies aimed at examining the relationship between capital structure and firm performance.
While the literature examining the performance implications of capital structure choices is immense in developed economies like USA and Europe, little is empirically known about such implications in emerging economies like Nigeria. As Eldomiaty (2007) argues, capital market is less efficient and incomplete and suffers from higher level of information asymmetry than capital markets in developed countries. It is worthy to note and acknowledge that, researchers in Nigeria have also attempted to find this relationship. Oke and Afolabi (2007) researched on capital structure and industrial performance from 1999-2004 and used debt financing, equity financing, debt-equity ratio and profitability index as a measure of profitability. Onaolapo and Kajola (2010) researched on capital structure and firm performance using non-financial firms and debt ratio, Return on assets (ROA) and Return on equity (ROE) as indicators.
Omorogie and Erah (2010) researched on capital structure and corporate performance in Nigeria from 1995-2004 and used corporate performance, growth opportunity, non-debt tax shield, tangibility, profitability and earning volatility as proxies. Ishola (2008) researched on sensitivity of performance to capital structure from 2000-2004 and used Degree of Operating Leverage (DOL), Degree of Financial Leverage (DFL) and Degree of Combined Leverage (DCL) as well as Dividends Per Share (DPS), Earnings Before Interest and Taxes (EBIT) as indicators.
STATEMENT OF THE RESEARCH PROBLEM
Survival and growth needs resources but financing these resources has limitations. The analysis of the impact of capital choice on profit is as important as the overall existence of the banking industries themselves. It is especially important when one is considering the dwindling fortunes of aftermath of global economic recession which might not have unconnected with inappropriate capital structure.
To this end, the following problem questions are relevant and will be addressed by the study.
What is the relationship between size of bank and the capital structure?
What is the relationship between profitability and the capital structure?
What is the relationship between tangibility and the capital structure?
OBJECTIVES OF THE STUDY
The main objective of this objective is to examine the determinant of capital structure in ECO Bank PLC in Nigeria.
The specific objectives are:
To ascertain the relationship between size of bank and the capital structure of a bank.
To find and examine the relationship between profitability and the capital structure of a bank.
To examine the relationship between growth and the capital structure of a bank.
To ascertain the relationship between tangibility and the capital structure of a bank.
The following hypotheses have been formulated to serve as a base for this research;
There is a significant relationship between size of bank and the capital structure.
There is a significant relationship between profitability and the capital structure.
To examine the relationship between growth and the capital structure of a bank
There is a significant relationship between tangibility and the capital structure.
SCOPE OF THE STUDY
This research work is an empirical study on the determinant of capital structure in ECO Bank PLC.
The population of the study is entire banks quoted in the Nigeria Stock Exchange, while the sample is restricted to ECO Bank PLC.
The length of period covered by the study is 2006 – 2011 (5 years).
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the determinant of capital structure of banks in Nigeria. The study would also facilitate the examination of the effects of capital structure and bank performance and thus boosting the empirical evidence from Nigeria. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in economic modeling and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to investment analysts, investors and corporations in examining the effectiveness of capital structure on banks performance.
It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.
LIMITATION OF THE STUDY
In the course of carry out this study, the researcher encountered some constraints such as finance, time, the response rate of the respondents. Access to current data as most management staff would not want to discuss relevant information about their bank. This again played a major constraint on this study.
OPERATIONAL DEFINITION OF TERMS
Capital: Capital relates to the proportion of different types of securities both dist and equity issued by a company.
Capital Structure: Capital structure relates to the mix of the long-term sources of funds used by the company.
Firm Performance: A firm’s performance measure prescribed indicators of effectiveness, efficiency and productivity.
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