Firm size and corporatefinancial-leverage choicein a developing economy

Evidence from Nigeria

Abel Ebel EzeohaDepartment of Banking and Finance, Faculty of Management Sciences,

Ebonyi State University, Abakaliki, Nigeria

Abstract

Purpose – The purpose of this paper is to investigate, from an undeveloped market perspective, thenature and significance of firm size as a determinant of corporate financial leverage.

Design/methodology/approach – A panel data fixed-effects regression model is used to estimatethe relationship between financial leverage and firm size, while controlling also for the effects of otheracclaimed determinants like asset tangibility, profitability and firm age. The dataset used covers 71firms quoted in the Nigerian stock markets over a 17-year period (1990-2006).

Findings – The study reveals that as much as 91.4 percent of the total finances of Nigerian-quotedfirms is of short-term liabilities, with just 8.6 percent constituting long-term liabilities. It finds that firmsize is negatively and significantly related to financial leverage. Controlling for some otherdeterminants, the arising results tend to confirm an over-bearing influence of the pecking order theoryin the financing patterns of Nigerian-quoted firms – by revealing that the relationship betweenprofitability and financial leverage is highly significant and negative; and that firm-age is positivelyand significantly related to financial leverage.

Originality/value – Using data from a country with undeveloped and inefficient financial markets,this paper provides an important insight on the international debate on the effects of size on corporatedecisions.

Keywords Business development, Gearing, Developing countries, Nigeria

Paper type Research paper

IntroductionThe size of a firm plays an important role in determining the kind of relationship thefirm enjoys within and outside its operating environment. The larger a firm is, thegreater the influence it has on its stakeholders. Again, the growing influences ofconglomerates and multinational corporations in today’s global economy (and in localeconomies where they operate) are indicative of what role size plays within the

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This paper is an output of the author’s Phd dissertation at the University of Nigeria.The author is grateful to Professors Francis Okafor and Chibuke Uche for their excellent

supervision; to the Doctoral students participants at the 2007 Financial Management AssociationDoctoral Student Seminar in Spain for their useful comments; to the American FinanceAssociation and the Allied Social Sciences Association for granting him the sponsorship andopportunity to participate at their January 2007 Annual Meeting and conference in Chicago USA;and to the participants at the September 2006 UNISA/UN Global Compact Symposium onCorporate Citizenship for their useful comments. He also appreciates the excellent revisionoffered by Boniface Eze and the anonymous referee.

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The Journal of Risk FinanceVol. 9 No. 4, 2008

pp. 351-364q Emerald Group Publishing Limited

1526-5943DOI 10.1108/15265940810895016

corporate environment. Refocusing the importance of size in corporate discourse,Kumar et al. (2001) argue that an interesting aspect of economic growth is that much ofit takes place through the growth in the size of existing organizations. They cite Rajanand Zingales (1995) whose study in the sample of 43 countries show that two-thirds ofthe growth in industries over the 1980s, comes from the growth in the size of existingestablishments, while only one-third trickled in from the creation of new ones.

As the popularity of corporate size phenomenon continues to rise within the externalbusiness environments, more attentions are being pushed to its real effects on theinternal structures of corporations and the specific impact on the relationship betweenthe firm and its key stakeholders. One of the most popular areas where the influence offirm size has been much queried is the area of practice of corporate finance. Graham andHarvey (2002), for instance, through their survey, sort the views of about 392 chieffinancial officers from about 4,440 firms on the current practice of corporate finance.Results of the survey show that firm size significantly affects the practice of corporatefinance. In the same vein, a survey by the International Finance Corporation also focusedon the financing patterns of private enterprises in China, with a revelation that therelative importance of different sources of financing among surveyed firms depends onfirm size, with informal sources tending to become less important as firms grow larger.

Emerging issues in the whole debate suggest that the impact of size on financialleverage may actually depend on the level of financial markets development in a particularcountry. Beck et al. (2005) for instance, studied whether the effect of corruption, financialand legal obstacles on firm’s growth varies across firms of different sizes. They up withsome findings that the extent to which financial and legal underdevelopment andcorruption constrain firm’s growth depends very much on a firm’s size (p. 170). Accordingto Li et al. (2007) also, large economies benefit firms of different sizes, especially smallfirms, in assessing long-term loans, whereas fast-growing economies only increase theaccess of large and medium firms to long-term debt.

This study, considering the peculiar economic characteristics of most developingcountries and using data from Nigerian-quoted companies, primarily aims atinvestigating the actual effects of firm size on the financial leverage of firms in adeveloping economy. Incidentally, size is an important distinguishing factor betweendeveloped and developing economies since what constitute a very small firm in theformer might, in the later, be a very larger firm. The Nigerian case is an interesting andpeculiar one, considering the fact that researches are yet to capture the sweepingimpact of such government programs like privatization and persistent financialsystems reforms on the modus of business operations.

Review of related literatureCorporate size seems to be one of the most theorized determinants of financial leverage.In effect, the relationship between size and financial leverage has been explained byvirtually all the mainstream capital structure theories (Schoubben and van Hulle, 2004,p. 595). At the same time, recent studies on corporate capital structure continue to testthe validity of the earlier hypotheses on the relationship existing between the twovariables. In general, most theoretical and empirical arguments seem to focus on therelationship between the capital structures of smaller firms and those of larger firms.There is however, much theoretical contention over which of the two carriesmore debts. On the theoretical side, while the pecking-order hypothesis upholds

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the negative linearity between size and leverage, the tradeoff theory seem to haveproposed otherwise.

Schwartz and van Tassel (1950, pp. 412-13) are among the earliest researchers toempirically confirm the positive relationship between size and leverage. These mencontend otherwise that the small corporation can and does obtain most of the funds itneeds from the owner-managers (internal equity); and that high cost of registering andissuing stocks and bonds limit the capacity of small- and medium-sized corporations toaccess the capital market. Both Titman and Wessels (1988, p. 6) and Coleman and Cohn(1999) expand this position when they stressed the exorbitances in cost of issuing debtand equity securities. They asserted that this situation is directly related to firm sizeand in turn may force small firms to tilt towards the use of, mostly, short-term debts.In the case of business start-ups, which are know to be relatively smaller at inception,Huyghebaert (2006, p. 307; 2007, p. 105) posited the non-historicity of such businessesand, consequently, their lack of an established relationship with banks and fundssuppliers that could have guaranteed them access to other forms of capital.

Among the factors that have been used to support the positive linearity argumentsinclude the fact that larger firms are more diversified; they have higher capacity to meetup with interest payments, and are more diversified than smaller firms (Pandey, 2004,p. 84; Cardone-Riportella and Cazorla-Papis, 2001). Such companies are also found tohave been enjoying higher degree of information disclosure (Fama and Jensen, 1983;Rajan and Zingales, 1995), and they have higher collateral values and lesser bankruptcyrisks (King, 1977). All these factors are argued by the above-cited researchers to havecreated more leverage opportunities to larger firms over smaller firms.

The theoretical relationship between size and investments again may help to explainwhy, a priori, large firms seem to be more leveraged. Large firms supposedly ought to havehigher investment opportunities (and so should also have higher need for cash) thansmaller firms (Gonenc, 2005; Dittmar, 2004, p. 12). Central to the above general positions isthe truth that as a firm grows in size, its ability to borrow increases, and so, its debt-equityratio increases concurrently. Within the circuit of small firms, need for funds may belimited by the fact that their scales of operations are also limited. Consequently, not onlywould banks and investors alike be afraid of committing funds in the projects of smallbusinesses, the small firms themselves may be indisposed to exposing themselves to risksassociated with distress and bankruptcy, as well as loss of ownership.

The above assertion that size directly relates to financial leverage has not beenwithout some dissenting views. As opposed to the static trade-off theory, size mayhave a positive impact on low- and moderate debt-ratios but a negligible or even zeroimpact on firms with high-debt ratios (Fattouh et al., 2002). It may be this time seriesreaction that has given rise to the other side of the argument – that size is negativelyrelated to financial leverage. As for the pecking order hypothesis, Drobetz and Fix(2003), Fama and French (2002), Cosh and Hughes (1994), Erickson and Trevino (1994)and Baskin (1989) are among researchers that investigated and reaffirmed the validityof the pecking order theory by examining the relationship between size and leverage.

The strong empirical and theoretical evidence on positive linearity (of size) with thestrong theoretical explanations offered by Rajan and Zingales (1995), Mat Nor andAriffi (2006) and Titman and Wessels (1988) among others, that size and leverage arenegatively correlated, may also be compared. According to Rajan and Zingales (1995,p. 453), large firms may favor equity financing than debt financing due to the relativity

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of the cost of equity financing owing to asymmetric information which is small forsuch firms. Such firms may also be enjoying some reputation advantage amongprospective investors especially, as a result of their consolidation in theindustry/market. Therefore, they may prefer to exploit this opportunity instead ofapproaching the more expensive bank lending or other covenant-prone capital marketdebt instruments. Other supporters of the negative linear relationship between size andleverage are Cooley and Quandrini (2001), who find that smaller and younger firms payfewer dividends, take on more debt, and comparatively invest more than relativelylarge firms. Others are Mat Nor and Ariffi (2006) and Berger and Udell (1994) whosestudies reveal more often than not, that small firms do fall back heavily on bank loansfor their financing requirements and become heavily indebted than larger companies.Faulkender and Petersen (2006), Bevan and Danbolt (2002), Titman and Wessels (1988),and Marsh (1982) equally support the conclusion that size and financial leverage havenegative relationship because, large firms have more access to equity funding thansmall firms. Faulkender and Petersen (2006, p. 59) specifically demonstrate that by avery wide magnitude, larger firms are less levered, with an increase in market value.This value ranges from a 25th to 75th percentile and has the ability to lower firm’sleverage by an almost 3 percentage point. Drobetz and Fix (2003), also find that largefirms are more closely observed by analysts and should therefore be more capable ofissuing information-sensitive equity, and have lower debt.

It is worthwhile to state that the effect firm size has on leverage depends equallyon the level of financial markets development within an economy. Li (2005) makeclearer the implications of this condition. The results of their work interestinglydemonstrate that large economies benefit firms of different sizes, especially smallfirms, to access long-term borrowing. Fast-growing economies only increase the accessof large and medium firms to long-term debt. This important finding suggests thatregional economic development might hurt small firms’ access to long-term financing.In the case of banking industry consolidation, for instance, a good number of similarstudies across nations, including those of Berger et al. (1999), di Patti and Gobbi (2007)and Walraven (1997), resolve that to a large extent, consolidation reduced small scalelending among banks.

It does not make practical sense, anyway, to conclude that size simultaneouslymaintains both negative and positive relationship with financial leverage. Neither doesit make sense to conclude that the findings of previous works are contextually wrong;nor that empirical and theoretical reasoning on the subject are based on conventionsand expectations for general practice. It cannot also be argued that size and leverageare not correlated in any manner. In practice, essentially, firm-size constitutes animportant consideration for corporate financing.

Where then are the sources of this mirage of differences? One possible reason for thedivergences could be the adoption of varying definitions of firm size in the studiesreported herein. For instance, Pandey (2004) whose work is relatively current in the areauses logarithm of total assets as a measure of corporate/firm size. While, he acceptstotal assets as good measure of size, Huang and Song (2002) do not completely agree onthe use of logarithm of total assets. They, instead, choose to make use of the absolutevalues of total assets or the logarithm of sales as better measures of size, becauseaccording to them the two are highly correlated with a coefficient of 0.79. They gofurther to explain that the use of logarithm of sales is called for because of the fact that

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size effect on leverage is nonlinear. Another possibility, as earlier argued by Homaifaret al. (1994), could be the inability of past empirical studies to clearly separate theshort-run relationship between leverage and its determinants from its long-runrelationship – factors they say make the value of prior empirical evidence on capitalstructure questionable.

Another important point to note is the growing assumption that the influence of sizeon leverage may vary across countries. Barbosa and Moraes (2003), for instance, citeTamani (1980) as the first seeming study to investigate the effects of size on financialleverage across countries with particular interest on identifying patternsdistinguishing very small firms from their large counterparts. They represent themajor findings of the Tamani study to include: that financial leverage varies acrosssize than across countries; that small firms rely more on short-term financing borrowedfrom trade and other non-bank creditors, and has the tendency to finance long-termassets with short-term funding relative to big enterprises. As argued by Li (2005), largeeconomies benefit firms of different sizes, especially small firms, in accessing long-termborrowing; with fast-growing economies only increasing the access of large andmedium firms to long-term debt. These men reiterate the importance of their findings,which suggest that on average, regional economic development might hurt small firms’access to long-term financing. In general, firms in developing countries may have lesslong-term debt than firms in developed countries simply because they have differentcharacteristics, rather than necessarily implying a deficiency in the credit market(Caprio and Demirguc-Kunt, 1997).

In the case of Nigeria, the influence of size in the corporate environment cannot beoveremphasized. In line with the earlier stance of Laudadio (1963), banks in the countryare also found to be discriminatory in terms of interest charges on loans betweenhigh-net worth customers and small borrowers. While, it is customary for banks tolend to the former on prime rates, the maximum rates are applicable to lending to smallborrowers and other customers (Bakare, 2004, p. 173; CBN, 1995, p. 5). The high cost ofaccessing the capital market and the attended conditions also seem to favor large firmsmore than small firms. Easterwood and Kadapakkam (2001, p. 50) offer someexplanation on why it may be difficult for small firms with small capital issues toapproach the capital market for funds. According to them, public offerings areassociated with significant issue costs such as fees for SEC registration, listing,trustees, investment bankers, and printing. They go further to argue that firms withlarge issues have more viable access to public markets, because they can spread thefixed component of issue costs over the larger volume. This is an interesting factorconsidering that in Nigeria, the average costs of primary market issues is 6 percent(Securities and Exchange Commission, 2004).

The above situation, however, has more theoretical backing than empiricalconvictions. The actual impact of size on corporate borrowings remains yet to beestablished in the cases of most developing economies. With the exclusion of banksand other financial institutions among quoted firms in the Nigerian Stock Exchange,for instance, the total market capitalization has remained epidemically low – standingat just 46.6 percent of the total market capitalization in 2006 (The Nigerian StockExchange, 2006). This is an indication of an averagely low participation ofnon-financial firms in the equity market. The situation is not worse with the equitymarket. Almost, the same is applicable in the debt market. For instance, there is

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growing apathy among Nigerian banks in financing activities in the real sectors of theeconomy (Ezeoha, 2007a, b, pp. 164, 193). One of the major goals of this study thereforeis to establish some empirical bases for balancing empirical results of previous worksthat used data from developed economies.

Data and methodologyThis study focuses on empirically analyzing the impact of firm size on corporatefinancial leverage. The data used in the analysis are generated from financial reports ofthe quoted Nigerian companies between 1990 and 2006. By implication therefore, theresearch relies on panel data techniques. Based on the same reasons offered byprevious researchers, the dataset excludes firms in the financial and second tier sectorsof the Nigerian stock market. According to Pandey (2004, p. 84), the financialcharacteristics and use of leverage in such sectors are substantially different fromother companies. Also excluded are non-performing firms – defined here as thosewhose annual reports and accounts are in arrears for the past three years (since 2003);and firms quoted in the Nigerian Stock Exchange after 1990. Consistent with thefixed-effects hypothesis, the study adopts the panel fixed-effects regression technique,with financial leverage serving as the dependent variable, while the independentvariables include selected firm-specific characteristics.

Sources of dataThe study makes use of dataset generated from balance sheets and income statementsof quoted companies in Nigeria. The arising data are sourced from the Federal InlandRevenue Board, the Corporate Affairs Commission, and the Nigerian Stock Exchange.These sources are, incidentally, legal depositories of financial statements of companiesincorporated in Nigeria.

Population and sample sizeAs at the time of the study, there were 192 quoted financial, non-financial and secondtier firms in the Nigerian Stock Exchange. However, after adjusting for the factorsmentioned above, 71 quoted firms are finally selected for the study. Consequently,1,207 observations from 71 firms over a 17-year period (1990-2006) constitute thesample of the study.

Key variables used in the regression estimation include firm size andfinancial-leverage ratios, with profitability, firm-age and asset tangibility as controlvariables. In the regression estimation equation, financial leverage serves as thedependent variable, while the others constitute the independent variables. Threemeasures of financial leverage – short-term debt, long-term debt, and total debtmeasures (as represented in equations 1-3 below) are adopted:

Financial Leverage ðFLÞ ¼ Total Debt=Total Assets ¼ TD=TA ð1Þ

Financial Leverage ðFLÞ ¼ Short 2 term Debt=Total Assets ¼ STD=TA ð2Þ

Financial Leverage ðFLÞ ¼ Long 2 term Debt=Total Assets ¼ LTD=TA ð3Þ

The relationship between financial-leverage measures, as defined above, and theexplanatory variables is estimated thus:

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TD=TA;i; j ¼ ai þ b1LogSales;j;i þb2FA=TA;j;i þB3EBIT=TA;j;i

þ b4LogAge;j;i þ1;j;ið4Þ

STD=TAj;i; ¼ ai þ b1LogSales;j;i þb2FA=TA;j;i þB3EBIT=TA;j;i

þ b4LogAge;j;i þ1;j;ið5Þ

LTD=TA;i; j ¼ ai þ b1LogSales;j;i þb2FA=TA;j;i þB3EBIT=TA;j;i

þ b4LogAge;j;i þ1;j;ið6Þ

Drawing from the mathematical definitions adopted by previous studies onfinancial-leverage determinants, the key variables for the above estimations aredefined as follows:

. TD/TA, i, j is total liabilities divided by total assets for firm j in time i.

. LTD/TA, i, j is long-term debts divided by total assets for firm j in time i.

. STD/TA, i, j is short-term debts divided by total assets for firm j in time i.

. LogSales, i, j is a proxy for firm size and equals natural logarithm of sales for firmj in time i.

. FA/TA, I, j is a proxy for asset tangibility and equals fixed assets divided by totalassets for firm j in time i.

. EBIT/TA, j,i is a proxy for profitability and equals earnings before interest andtax divided by total assets for firm j in time i.

. LogAge, j,i is a proxy for firm-age and equals natural logarithm of number ofyears firm existed before incorporation for firm j in time i.

. 1, j,i is the error term.

Empirical resultsTable I summarizes the averages and standard deviations of the different measures offinancial leverage and related exogenous variables. As shown in the table, the averageratio of total liabilities to total assets among Nigerian-quoted firms stands at 70.66 percent.Of this rate, the ratio of current liabilities/short-term debts stands at 64.6 percent, whilelong-term debt ratio is 6.06 percent. This shows that Nigerian firms finance theiroperations mainly with short-term liabilities, and rely less on long-term debts. It also layscredence to a claim that firms find it difficult to access long-term finances because of thehigh level of financing frictions in the country’s financial system. The low-standard

Variable Observation Mean SD Minimum Maximum

Total debt ratio 1,124 0.707 1.770 0.000 51.800Short-term debt ratio 1,124 0.646 1.714 0.000 50.943Long-term debt ratio 1,124 0.061 0.169 0.000 3.575Firm size 1,144 3.018 0.897 20.523 5.103Asset tangibility 1,123 0.367 0.416 0.000 9.405Profitability 1,126 0.091 0.220 22.400 1.875Firm age 1,204 1.505 0.187 0.778 1.919

Table I.Summaries of basic

descriptive statistics

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deviations associated with long-term debt ratio, profitability and firm age provides someindications that Nigerian-quoted firms generally make less use of long-term finance, havelow-profitability ratio, and are of relatively the same age. The result on firm age furtherconfirms the notion that the equity market in Nigeria has not being a very popular one,especially to non-financial firms operating in the country.

Table II reports the degree of correlation between each pair of variables – both forthe dependent and the independent variables. As expected, the results indicate thatboth the short-term debt measure and the long-term debt measure are stronglypositively correlated with total debt measure – at 98.5 percent and 51.2 percent,respectively. Apart from firm age and firm size that are correlated positively at 43.1percent, there is very little case of inter-correlation between each pair of the exogenousvariables. Thus, there seems to be no course to suspect serious cases ofmulticollinearity in the variables.

Hausman’s test is used to determine which of the two basic approaches for panelestimation model – the fixed-effects and random-effects models – best fits ourestimation model. The results arising from both models are presented in Table III.The results show that the test value is 39.37, and that the associated probability is0 percent. Based on the above results, we reject the null hypothesis and, conclude infavor of the absence of random effects in the model, and that the difference in thecoefficients of the two models is systematic. Thus, the fixed-effects panel regression issued as basis for assessing the impact of firm size on financial-leverage practicesin Nigerian-quoted firms.

Finally, Table IV reports the results of the fixed-effects panel regression. Theresults agree very consistently with the propositions of the pecking order hypothesis;

Totaldebtratio

Short-termdebtratio

Long-termdebtratio

Firmsize

Assettangibility Profitability

Firmage

Total debt ratio 1.000Short-term debt ratio 0.985 1.000Long-term debt ratio 0.512 0.354 1.000Firm size 0.036 0.029 0.047 1.000Asset tangibility 0.008 20.039 0.232 0.013 1.000Profitability 20.267 20.284 20.032 0.087 20.064 1.000Firm age 20.039 20.021 20.105 0.431 20.035 20.037 1.000

Table II.Correlation results on therelationship among theestimation variables

Within-groups(fixed-effects model)

(1)

Generalized least square(random-effects model)

(2)Difference(1) 2 (2)

Firm size 20.321 * (0.080) 0.007 (0.051) 20.328Asset tangibility 20.055 (0.064) 20.035 (0.063) 20.020Profitability 20.925 * (0.145) 21.167 * (0.138) 0.241Firm age 2.760 * (0.585) 0.261 (0.278) 2.500

Notes: *Significant at 5 percent level; x 2 value ¼ 39.370; Prob . x 2 ¼ 0.000

Table III.Estimated coefficients forboth the fixed- and therandom-effects models

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and state that size is negatively and significantly related to financial leverage. Thisindicates that the larger a firm is, the less its likelihood of using debt financing. Asshown in the table, the result is the same when short-term debt ratio and long-termdebt ratio are substitutionally used as the endogenous variables. The results contradictthe earlier findings of researchers that resolve empirically, that the relationshipbetween size and leverage is positively significant (examples of such studies are:Padron et al., 2005; Rajan and Zingales, 1995; Ferri and Jones, 1979; and among others).The findings, however, is in consonance with the empirical findings of Cooley andQuandrini (2001), Gupta (1969), Faulkender and Petersen (2006), Graham (2000), as wellas Titman and Wessels (1988) who conclude alike that firm size and financial leveragehave negative relationship. The reason, according to these researchers, is that largerfirms have more access to the equity market and may have more accumulated internalfinances than smaller firms.

Additional explanation to the negativity of the relationship between size andleverage could be drawn from the empirical evidences arising from the use of Nigeriandata. Given the undeveloped and very inefficient nature of the Nigerian financialmarkets, it is possible that larger firms that have built enough reserves may choose tofinance their operations through their respective internal markets, rather than passingthrough the difficulties inherent in accessing the external financial markets. Thisimpression is supported by other empirical results from Desai et al. (2004) and Li (2005)who both resolve that larger firms are financed with less external debts in countrieswith undeveloped capital markets or weak creditor rights.

The results on the other controlling variables complementarily confirm anover-bearing influence of the pecking order theory in the financing patterns ofNigerian-quoted firms. The results show, for instance, that the relationship betweenprofitability and financial leverage is highly significant and negative – indicating thatfirms that are more profitable are very much likely to rely on internal capital infinancing their operations. Firm-age is found to have positive and significantrelationship with financial leverage – implying that the older a firm is, the more likelyit may have accumulated internal finances, and the less likely it would rely onborrowed funds. It is also found that asset tangibility has positive but non-significant

Exogenous variablesEndogenous variable:

TDREndogenous variable:

STDREndogenous variable:

LTDR

Constant 22.410 (24.12) * 22.087 (23.89) * 20.323 (22.90) *

Firm size 20.321 (24.02) * 20.273 (23.72) * 20.048 (23.17) *

Asset tangibility 20.055 (0.064) 20.112 (21.90) * 0.057 (4.65) *

Profitability 20.925 (26.39) * 20.950 (27.14) * 0.025 (0.89)Firm age 2.760 (5.57) * 2.424 (5.33) * 0.336 (3.57) *

R 2

Within 0.092 0.102 0.034Between 0.050 0.026 0.093Overall 0.001 0.007 0.003F-test 26.09 29.26 8.98Prob . F 0.000 0.000 0.000No of observations 1,102 1,102 1,102

Notes: *Regression significant at 5 percent level of significance; while t-values are in parentheses

Table IV.Fixed-effects regression

estimation results

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coefficient – indicating the less influence of collateral values in the total financingbehavior of firms in Nigeria. The latter is not surprising because the financingstructures of the firms are dominated by current liabilities, which invariably do notrequire such collateral deposits. This claim is further validated by the fact that, withlong-term debt measure as the dependent variable, the coefficient of asset tangibility isfound to be strongly positive and significant – thus providing some empiricalvalidation to the tradeoff theory that is applicable only in the case of long-termfinancing patterns of the firms.

ConclusionsThis study provides some reasonable revelations on the effects of firm size on thecorporate financing behaviors of firms operating in a country with an undeveloped,inefficient and complex financial system. Using panel data from quoted Nigeriancompanies, the study establishes that the basic characteristics of firms are moreconsistent with the fixed effects, than with the random-effects estimation model. Thestudy finds some pecking order patterns in the financing choices of the firms, withlarge, more profitable and older firms tending to rely less on debt financing, and moreon other sources. The study shows, however, that because of the constraints in thecountry’s financial system, Nigerian firms have a common practice of pecking onshort-term financing than on the long-term financing, irrespective of their corporatesizes. Of the 70.7 percent found as the average total debts to total assets ratio amongthe firms, for instance, as high as 91.4 percent is of short-term liabilities, while only8.6 percent constitutes long-term liabilities. The practical implication is that because oftheir predominant use of short-term finances, even the larger Nigerian firms mayremain constrained in making capital investments necessary for growth. They,therefore, need to take advantage of their sizes to build strong reputation andhigh-collateral values that help to guarantee access to long-term equity and debtfinances.

Admittedly, the geographical scope of this study may be considered small, at leastfrom an international point of view. The geographical scope may therefore beexpanded in future studies to cover those African countries that have similar economiccharacteristics, and where the financial markets have been seriously weakened bypersistent economic and political crises. Again, the study makes use of only quotednon-financial firms – hence sending a signal that the results reached may not beextended to apply in the cases of unquoted firms and small and medium scaleenterprises. It makes a research sense, therefore to investigate the impact of size onthe funding habits of these categories of firms. A study that compares empirically thefinancial-leverage determinants of quoted and non-quoted companies would also helpto throw more light on the dynamics of firm-size and financing patterns in theSub-Saharan African economies.

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Further reading

Bari, F. (2003), “Analyzing growth in South Asia: special reference to East Asia”, NIPA KarachiJournal, Vol. 8 No. 1, pp. 47-62.

Beckner-Blease, J.R., Baumann, H. and Kaen, F.R. (2005), “An investigation of the small firmeffect using accounting measures of profitability: does it exist?”, paper presented at theFinancial Management Association Conference, January.

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Kumar, J. (2004), “Does ownership structure influence firm value? Evidence from India”,EconWPA Finance Series No. 0406008.

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Weill, L. (2004), “Leverage and corporate performance: a frontier efficiency analysis of Europeancountries”, working paper, Institute d’Etudes Politiques, Strasbourg.

Corresponding authorAbel Ebel Ezeoha can be contacted at: aezeoha@yahoo.co.uk

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