DETERMINANTS OF CAPITAL STRUCTURE OF FIDELITY 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
Determinants of Capital Structure Policy
Capital Structure in the Banking Firm
Capital Structure and Corporate Performance
CHAPTER THREE: RESEARCH METHODOLOGY
Population of the Study
The Sample Size
Sources of Data
Measurement of Variables
Method of Data Analysis
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF RESULT
Analysis of Data
Discussion of Findings
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
BACKGROUND TO THE STUDY
The majority of Nigerian banks are in ruins which may not be unconnected with the capital structure (debt-equity mix) of the bank. It is therefore imperative for financial manager of bank to determine the proportion of equity-capital and debt-capital to obtain financing mix that will give us optimal capital structure. An optimal capital structure is a critical decision for any business organization (Pandey, 2009). The decision is important not only because of the need to maximize returns to various organizational constituencies but also because of the impact such decision has on an organization’s ability to deal with it’s competitive environment
Capital structure is used to represent the proportionate relationship between debt and equity. Equity includes paid- up share capital, share premium, reserves and retained earnings. In the case of debt, short term borrowing are traditionally excluded from the list of method of financing the firm capital budgeting decision and therefore the long-term claims(such as long term loan and debentures) are said to be a part of the capital structure. The question then is; how much equity do we have? Or how much equity can be raised from all sources? And where will the equity come from? For the majority of companies these questions are relevant, since the corporation did not need to maintain separate equity for their branches.
In as much as capital investment decisions have implications for many aspects of operations and often exert a crucial impact on survival, profitability and growth. Much of the theory in the corporate sector is based on the assumption that the goal of firm should be to maximize the wealth of its current shareholders. One of the major cornerstones of determining this goal is financial ratio. Financial ratios are commonly used to measure firm performances. Generally, corporation includes them in their annual reports to stakeholders. Investment analysts provide them for investors who are considering the purchase of a firm’s securities.
Financial ratio represents an attempt to standardize financial information to facilitate meaningful comparisons. It provides the basis for answering some very important questions concerning the financial well-being of the firm. Its objectives is to determine the firm’s financial strengths and to identify its weaknesses (Mahdi, 2009).This study would therefore seek to establish the fact that there is a relationship between the capital structure and corporate performance.
STATEMENT OF THE RESEARCH PROBLEM
The capital structure mix that a company decides will definitely have an effect on its value. A cursory look will be taken on the extent to which capital structure relate to the market value, there is need to seek answers to the following;
What is the relationship between size of a bank and its capital structure?
What is the relationship between profitability of a bank and its capital structure?
What is the relationship between growth of a bank and its capital structure?
What is the relationship between tangibility of a bank and its capital structure?
OBJECTIVES OF THE STUDY
The main objective of this objective is to examine the determinant of capital structure in Fidelity Bank PLC. The specific objectives are:
To find out the relationship between size of a bank and its capital structure.
To examine the relationship between profitability of a bank and its capital structure.
To ascertain the relationship between growth of a bank and its capital structure.
To ascertain the relationship between tangibility of a bank and its capital structure.
This study has the following hypotheses;
There is a significant relationship between size of a bank and the capital structure.
There is a significant relationship between profitability of a bank and its capital structure.
There is a significant relationship between growth of a bank and its capital structure of Fidelity Bank PLC.
There is a significant relationship between tangibility of a bank and its capital structure.
SCOPE OF THE STUDY
The population of the study is entire banks quoted in the Nigeria Stock Exchange, while the sample is restricted to Fidelity Bank PLC.
The length of period covered by the study is 2002 – 2011.
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
The low response rate from respondents is also a limiting factor including the imprecise measurement of variables.
The sample size and the inability to obtain a completely random sample is also a limiting factor to this research work.
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.
Mahdi, S. and Kumars, B, (2009). “Study of the Relationship between Capital Structure Measures and Performance Evidence from Iran”. International Journal of Business and Management, 4: 97 – 103.
Pandey, I. M. (1999). Financial Management, 8th Edn., Vikas Publishing House, PVT Ltd, New Delhi India, 529 – 559.
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