IIARD International Institute of Academic Research and Development

WORLD JOURNAL OF FINANCE AND INVESTMENT RESEARCH (WJFIR )

E-ISSN 2550-7125
P-ISSN 2682-5902
VOL. 8 NO. 2 2024
DOI: https://doi.org/10.56201/wjfir.v8.no2.2024.pg41.52

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Plausibility Test of Optimal Capital Structure with a Dynamic Model

James A. Sarakiri (Ph.D)

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Abstract

This study empirically tests the plausibility of optimal capital structure within the context of the three major theories (trade-off, pecking order and agency costs) using the dynamic fixed effect dummy variable regression model. The analysis is conducted using a panel dataset obtained from 11 listed food and beverages companies covering the period from 2011 to 2020. The results show evidence that the three theories are all operational in the Nigerian food and beverages industry. Specifically, we find that debt-equity ratio responds significantly to changes in effective corporate tax rate, earnings to price ratio, asset utilization rate and firm size. Our results also indicate that debt-equity ratio is persistent meaning that it depends on its previous level. Hence, we conclude that optimal capital structure is a function of corporate income tax, degree of asymmetric information in the capital market and the tendency for corporate managers to pursue the interest of shareholders.

keywords:

capital structure, trade-off theory, pecking order theory, agency costs theory

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References:

Abba, M., Yahaya, L., & Suleiman, N. (2018). Contextual factors affecting capital structure
financing of the Nigerian listed companies. Journal of Accounting and Financial
Management ISSN, 4(5), 28-39.

Anande-Kur, F. A. N. E. N., & Agbo, A. L. E. M. A. T. U. (2018). Determinants of capital
structure in the Nigerian manufacturing sector. AE-Funai Journal of Accounting,
Business and Finance, 3 (1), 178-185.

Ang, J. S., Cole, R. A., & Lin, J. W. (2000). Agency costs and ownership structure. The
Journal of Finance, 55(1), 81-106.

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