Capital Structure and Post-privatization Value of Firms: Evidence from the Nigerian Stock Exchange

This study examined the impact of capital structure on the value (profitability) of privatized firms listed in the Nigerian Stock Exchange and determined their optimal capital structure. A panel data obtained from the Nigerian Stock Exchange and Securities and Exchange Commission during the period 2002-2009 was used for the study. The results of the OLS regression suggested a significant positive linear relationship between firm value and the capital structure measured by the ratio of total debt to total assets of the firm. There was also an evidence of positive linear relationship between firm value and company income tax as well as stock market development. Our results further showed that inflation and management restructuring dummy have a negative linear relationship with firm value. After controlling for a squared term of debt financing, the result suggested that corporate financing through debt tended to increase post-privatization value of firms up to a given level, after which any addition to the proportion of debt in the capital of the firms reduced their value. Furthermore, taking the second derivative of firm value, it is evident that the optimal capital structure of the firms that have been privatized and quoted in the Nigerian Stock Exchange is about 34.3%, 32.4% and 38.3% for Return on Sales, Return on Assets and Return on Equity. The study therefore recommended among others the need for all the privatized firms quoted in the Nigerian Stock Exchange to maintain optimum capital structure so as to enhance unprecedented increase in their post-privatization performance.