IIARD International Institute of Academic Research and Development

Journal of Accounting and Financial Management (JAFM )

E-ISSN 2504-8856
P-ISSN 2695-2211
VOL. 10 NO. 1 2024
DOI: https://doi.org/10.56201/jafm.v10.no1.2024.pg18.32

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Crowding Effects of Government Borrowing on Activities in the Private Sector: Another Evidence from Nigeria

James A. Sarakiri (Ph.D)

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Abstract

Motivated by the high and rising public debt profile in Nigeria, this study investigates public debt effects in relation to financial leverage and corporate investment in the private sector using the panel D-GMM framework. Three public debt ratios are considered: namely, external debt to GDP ratio, domestic debt to GDP ratio, debt service to GDP ratio. On the other hand, financial leverage is measured in terms of non-current liability to equity ratio, whereas corporate investment is measured in terms of total assets. The study is based on a panel sample comprising 156 firm- period observations from 2011 to 2022 in respect of thirteen (13) companies that are listed in the consumer goods sector of the Nigeria stock exchange. We find that both external debt and domestic debt exert a statistically significant effect on financial leverage, while none of the public debt ratios is significant in determining private sector investment. However, while increase in external debt is associated with increase in debt-equity ratio, increase in domestic debt reduces debt-equity ratio. Also, we find that debt service has a negative but with statistically insignificant effect on financial leverage. However, the effect of debt service on financial leverage appears to be significant in economic sense. These findings, which are largely robust, tend to validate the crowding-out effect, especially in the context of the relationship between domestic debt and corporate financing. Therefore, we recommend that Federal Government should borrow more from external sources than relying on domestic debt to finance the increasing fiscal deficit in order to protect the growth and performance of the private sector.

keywords:

Public debt, financial leverage, corporate investment, crowding-out effect theory

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References:

Akkoyun, C., Ersahin, N., & James, C. M. (2023). Crowded out from the beginning: Impact of
government debt on corporate financing. Journal of Financial Intermediation, 56, 1- 62.
https://doi.org/10.1016/j.jfi.2023.101046.

Akomolafe, K.H., Bosede, O., & Mark, A. (2014). Public debt and private investment in Nigeria. American Journal of Economics 5(5),501-507.
https://doi.org/10.5923/j.economics.20150505.10

Anyanwu, A., Gan, C., & Hu, B. (2018). Government domestic debt, private sector credit, and
crowding out effect in oil-dependent countries. Journal of Economic Research 22 (2017),
127-151.

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