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The Impact of Interest Rate Liberalization on the Corporate Financing Strategies of Quoted Companies in Nigeria

Listed author(s):
  • Davidson A.Omole
  • Gabriel O.Falokun
Registered author(s):

    This paper analysed empirically the linkages among interest rates and the leverage ratios (debt-to-equity ratio and debt-to-capital ratio) of selected firms, their investment, turnover and profits. The study used a survey of business as well as the quoted companies' final accounts and balance sheets, both before and after liberalization. The result of the study showed a link between interest rates and the corporate financing strategies and the profitability of firms. It also revealed that interest rate liberalization has a link with the growth of the equity markets. On sectoral analysis, the study indicated that the interest rate liberalization does not seem to have similar effects on all the investigated quoted companies. However, industrialists are shown to be sensitive to cost of production, with interest rates treated as a major component in the cost profile. Basically, all items of production are admitted to be affected by interest rate variations. The study therefore underscored the need to identify the trilogy of investment, production and finance and also to formulate policies that will not only integrate the entire financial markets (both the money and the capital markets) in an attempt to synchronize the benefits of liberalization, but also to facilitate the financial mobilization process of firms, so that their optimum contribution to development can be facilitated. The study sets out to examine empirically the pattern and direction of influence of interest rate liberalization on the corporate financing strategies of selected quoted companies in Nigeria, and the implications this will have for the effectiveness of interest rate policies. In the process, the effects of interest rate liberalization on firm profits, turnover, investment, etc., are also examined. The specific objectives of this study are to: 1.Trace the impact of interest rate liberalization on the leverage mix of quoted companies in Nigeria and the financing strategy adopted by them; 2.Examine the direct impact of interest rate liberalization on stock market activities; highlight the possible problems faced by quoted companies as well as the probable benefits to them of financial sector is liberalization; and 3.Draw policy conclusions for enhancing and synchronizing the probable benefits of interest rates liberalization.

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    Paper provided by African Economic Research Consortium in its series Research Papers with number RP_088.

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    Length: 52 pages
    Date of creation: Mar 1999
    Handle: RePEc:aer:rpaper:rp_088
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