Tasling the trade-off theory of capital structure.

INTRODUCTION: The theory of capital structure hare attracted a great affection in the field of corporate finance and accounting literature since the PHD thesis of chudion (1945) where lins research questions includes in what ways does the structure of asset and liatilities of a given concers reflet the kind of industry in which a concern is engaged the concern size and the level of protitability: question raised by chudion indicates that there is possibities of relationship between a compony is capital structure and the type of industry the size and the protitability of an organization the importance of capital structure theories was further realized and become a great debate since the publication of the Modigliani and millers (1958) irrelevance theory of capital structure where Modigliani and miller theory states that in absence of taxes banker uptey costs as ymmetric information and in an efficient matket the value of the company is not affected by its capital structure the value of the term and cost of capital are fully affected from investors expectation of the future benefits accued the assets to me form assumption and hare preference for purely debt financing due to the tax should in 19963 in corporate finance there exists a lot of studies that examines the capital structure the research in capital structure is dominated by the two theories the static trade-off theory and pecking order theory. The trade off thery focus on the balance between the benefits of interest tax shields and the cost of issuing debits to determine the optimum level of debts that a firm ought to issue to maximize is interest (2011) therefore the optimat capital structure is obtained where the net tax advantage of debt financing equate the cost of financial distress and bank associated with

the debt issue pending order theory states that form a distinct preference for using internal finance (such as retained earrings or excess liquid assts)order external finance if the internal funds are not enough to finance the inrestrement opportunities firms may or may not regret external financing and if they do they will choose among the different external finance sources in such a way to minibuses additional costs of asymmetric information the resisting pecking order of financing is an follows internally generated funds first followed by respectively low-risk debt financing and share financing accorded Kim (2011) the pecking order theory assumes that high protractible firm will hare a tendency of finance investment with internal finding and thus they will have a lower level of debt ratio static trade-off theory predicts a postures correlation between leverage and profitability No toroth standing the conceptual difference between pecking order and trade off theories distinguishing between the two in practice in not strahforward long and green (2004) but recent studies hare shown a focus shift from the trade-off theory to pecking order theory (Quan,2002 mazur, 2007) the paper will study the expend to which the pecking theory of capital structure provide satisfactory account if the financing behavior of quoted companies The theory The packing order theory was first introduced by Donaldson in 1961 and was further unified by myers and mayhifs in 1994 it states that firm has preference to finance is new investment first, them with debt and finally with issue of new equity Owing to asymetic information cost advising whem a firm choose not to finance its new investment with external finance makes the manger to have access to better information than the outsides. Mangers will issue sections when the market price of the share is higher than the real firm

value the deviation between the market price and the real form value is because investors do not have the real information about the value of the assets of the firm infers and majluf (1984). Some investor are avare that firm issue new share when the market over value the existing share therefore under priced the new share in the market to avoid the under pricing of the shares mangers should avoid issuing shares when ever possible the myers and majluf model predicts that mancyers will follow a pecking order using up internal final first them using up risky debt and finally resorty to equity myers and major (1984). The manager is preference for integral finance is to avoid the discipline of the marker (myer1984) and not to lose control over the form (Holmes and kent 1991) Transaction cost also play an importance role in capital structure decision. The transaction costs associated with obtain internal finance is longer than obtain new external financing the sides in continent with pecking order theory (viand 2005, major 2007) the alter nature hypotheses used to lest whether packing theory provide a satisfaction account of financing behavior are on follows. H:1These is a negative relationship between leverage rations and prodigality. H: 2 there is a positive relationship between coverage ralions and growth H: 3 there is a positive relationship between levers ratio and tangibility Vandals

This research paper proposed the falling turn characteristics an the independent viable which inclined protitalality growth, tax, asset, structure and dividend. Prodigality: pecking order theory states that turns tends to use internal finance first and than resort to external financing if the internal finance was exhausted Myers (1984) proposed a negative relationship between prodigality and debt this impress that profitable firm will hare to depend so much on external finance the firm will have less amount of coverage (Myers and mayluf, 1984) empirical evidence that support a native relationship between prodigality and coverage incised (Reyan and zingales 1995,Huang and song,2002,kester,1986,luper and isac,2002,oke and AFOLABI,2008 ). GROWTH There is controversy about the relationship between growth rate and cevel of coverage. According to pecking order theory a firm with new investment opportunity will first use internally generated funds when exhavsted the growing firm will use debt financing which implies firm will hare high leverage (Hassan,2011) on the other hand swath and watts (1992) find a negative relationship between debt and growth opporlilyty growth opportunities produce moral hazard effect and push firms to take more risk and in order to navigate this problem the firm should fianc the growth opporlinity with equity instead of debt. Studies that found a posture relationship between growth and capital structure (Bevin and danbolt, 2002) Driblets 2 and fix,2003. Tax:

Modghain and miller (1963) introduce the tax benefit of debt in which they proposed that company should aim toward entire debt financing due to tax deduction associated with interest payment on debt the theory encage the be of debt by turn as more debt increase the after tax caring to the ower. Mackie-mason (1990) conclude that tax has impack on the choice between debt and equoty since the charge in the marginal tax rate for any firm will affect the financing decision (chen,2011). Asset structure A firm with large amount of laughable assets can borrow at a relatively lower rate of interest of interest since the laughable assets can be used an collateral for the debt the pecking theory predicts that firms hold more laughable assets will less prone to asymeritrices information problems and reduce the agency cont (chen,2011) the firm that has tangible assets has the indenture of getting more debt at lower interest rate than a firm whose cost of borring is high because of having less fixed assets. (titman,1988) therefore there is a positive relation between assets structure and the capital structure the empirical studies that confirm this suggestion includes Rayan and singles 1995; friends and Lang, 1988; AMIDU 2007. SIZE. Size plays an important role in the capital structure the pecking order theory is applicable to small firms, because small try to meet their finance need with a pecking order of personal and relined earning, debt and assurance of new equity matlay (2007) assets that small form use external sources of finance only if the internal source are exhausted. The small firms are usually managed by few managers whose main objective is to minibuses

the intrusion in their business and that is why internal fund will be used first in their preference of finance (chen 2) therefore size of is firm considered to be positively related to capital structure (Huang and song; Rajah and Zingales, 1995,friend and lang,1988). The summary of the factor and their detonation according to chin 2002 are indicated below.

Table.1 Factors Variable name Definition Predicted relationship Prodigality Growth ROE GROE Return on equity Percentage change of not revenue Tax TAX Tax/profit between

Assets Size Dividend

AST DIV SIZE RESEARCH METHODS

fixed assets/total assets Log(nd-revence ) Dividend/EPS

This seminar paper adopts an from financial statement of companies firm period firm food, bereave and sector of the Nigeria stock exchange the reasons for the choice of this sector is that it has total market capitalization of N ------------ billion which is the highest among the sector instead on Nigeria stock exchange after the bank sector there are ------------- member in turn sector and sampling is used as negative values and missing data the companies includes. The dependent viable is the capital structure (DEBT) which is calculated by dividing debts by total capital. Tables 2. The correlation of the vandals.

DEBT DEBT ROE GROW 1.00 -0.201** 0.146*

ROE

GROW

AST

TAX

DIV

SIZE

1.00 0.321 1.00

AST TAX DIV SIZE

0.108 -0.028 0.024 0.198**

-0.038** 0.241* 0.023 0.136

0.101 -0.142 -0.056* 0.042

1.00 -0.210 -0.021 0.018 1.00 0.068 0.317** 1.00 -0.175 1.00

*P<0.05, **P<0.01

TABLE 3. Regression Unslandized constant 8.024 Results coefficient 1.423 6.242 0.000 T.value P.value

Roe Grow Ast Tax Div Size R-Squared Adjusted R-squared Durbin-Wationstat

-0.321 0.183 0.347 0.102 0.0.213 0.0.23

0.028 0.128 2.341 0.32 0.029 0.124

-4.345 2.095 0.027 0.049 0.434 0.678

0.000 0.000 0.927 0.927 0.934 0.781 0.672

0.6218 0.7239

1.8345 F-STATISTICS PROB (f-STAT) 6.3451 0.000021

The table 2 confirms that profitability and tax are negatively correlated with the capital structure where as growth, asset structure, divided and size have positive correlation with capital structure, dividend and size have positive correlation with camtac structure, this indicates that an increase in growth,

Asset structure, divided and size will result in an increase in debt while a decrease in profitability and tax will result in increase in debt. From the table 3, there in a significant negative correlation between the capital structure and Profitability which support the pecking order theory? Also, there is a significant positive relationship between growth, asset structure, tax, divided and size and the capital that the value of R2 is 62% which indicated that the cumulated influence of all the explanatory variable which other factor account for 38% of the dependent variable. The result of F- statistic value is 6.34 which implies that the model is well fitted and it powder an evidence of accepting that the capital structure determination have significant impact on the debt ratio in the fold, beverage and Industry. The divbin-witsom of 1.8 indicates that there is complete absence of serial correction with in the period of the study. CONCLUSION. This page present the testing of packing order theory of capital structure based on the date collection from-------------------------------- of food beverage companies quoted on the Nigerian stock exchange in conclusion the empirical evidence from the study that profitability and growth are important variable they influence the capital structure. Profitability has a negative correlation with capital structure which indicate that companion prefer to the internal fund to furnace new projects, and when the internal fund in not sufficient, the companies issues out debt, this in support of parking order theory an support by other researcher including (oke and afolabi, 2008, leper and Isaac, 2012)correlation with capital structure, this supports the pecking order theory which state that growing will trust internally generated fund, when exhausted, the growing torn will the debt fencing when will result in to higher overage then support the research work of bean and dentist, 2002, drobet2 and fix,2003).

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