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The Financing Behaviour of Firms in a Developing Economy: The Nigerian scenario

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  • Okoyeuzu Chinwe R.

    () (University of Nigeria, Enugu Campus. Department of Banking and Finance)

Abstract

The goal of this study is to ascertain the validity of the asymmetry of information idea in explaining the financing choice of firms in Nigeria. The sample covers 60 firms quoted in the Nigerian Stock Exchange. The Nigerian nation does not have a well developed capital market and so remain heavily on internal funding. Using a regression analysis, this study reveals that leverage is a decreasing function of profitability. This supports the pecking order theory. The current economic problems in Nigeria can be attributed not to too much reliance on financial markets, but to too little. There is some sort of misalignments between the capital market and the money market which is likely to affect the efficiency of one in meeting the financing needs of corporations. There should be complementary roles between the two markets. In Nigeria, this expected complementary roles between the two markets lag. While it makes sense, for instance for banks to brave up towards meeting the long term financing needs of firms, it is also very necessary for the other fund providers to design financing products that would help fill up arising financing gaps not covered by banks. We recommend that firms would have to device other strategic ways of diversifying their funding sources. One is by balancing their investments in both fixed and current assets.

Suggested Citation

  • Okoyeuzu Chinwe R., 2010. "The Financing Behaviour of Firms in a Developing Economy: The Nigerian scenario," EuroEconomica, Danubius University of Galati, issue 26, pages 115-119, November.
  • Handle: RePEc:dug:journl:y:2010:i:26:p:115-119
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    File URL: http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/721/658
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    References listed on IDEAS

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    1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    5. Amy Dittmar, 2004. "Capital Structure in Corporate Spin-Offs," The Journal of Business, University of Chicago Press, vol. 77(1), pages 9-44, January.
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