Local corporate ownership and capital structure decisions in Nigeria: a developing country perspective

Abel Ebel Ezeoha and Francis O. Okafor

Abel Ebel Ezeoha is a University Lecturer at the Department of Banking and Finance, Ebonyi State University, Abakaliki, Nigeria. Francis O. Okafor is a Professor based in the Department of Banking and Finance, University of Nigeria, Abakaliki, Nigeria.

Abstract Purpose The primary aim of this paper is to investigate the nature, degree and direction of the effects of certain classes of corporate ownership on capital structure decisions among rms. Design/methodology/approach Using a sample of 71 quoted companies in Nigeria, the study adopts panel xed effects regression models to estimate the relationship between nancial leverage and corporate ownership, while controlling for some rm-specic characteristics like protability, rm size and rm age. Findings The study nds that discrimination between indigenous and foreign rms is a major determinant of nancial leverage in Nigeria; and that the consistency of empirical results and capital structure theories across countries depends much on the dominant nature of corporate ownership structure. Research limitations/implications An attempt to widely generalize the results of this study may be challenged by its relatively small sample. With data from just a sample of 71 rms, the robustness of the country-, time- and company- effects may not have been fully captured in the estimation process. Practical implications The paper provides necessary platforms, especially to corporate managers, for aligning nancing decisions and ownership structure to other structural characteristics such as size, age, and protability. Originality/value The study is unique because it examines ownership effects on leverage using selected ownership classes; and because it focuses on an economy with harsh corporate operating environment and constrained capital market condition.. Keywords Corporate ownership, Capital structure, Developing countries, Nigeria, Decision making Paper type Research paper

Introduction
The excusable position of theorists that ownership plays almost unlimited roles in corporate nancial management is only appreciable in an owner-controlled corporate environment. While this position was acceptable before some landscape discoveries of nancial and investment studies, the structures of modern corporations have reduced the linear approach earlier adopted by nancial researchers and theorists. From a legal point of view, corporations are dened as business institutions with separate legal entity, resulting to a divorce of ownership from control. Consequently, management and board are entrusted with the task of taking major business decisions mainly as stockholders agents. In a situation like this, it becomes difcult to measure the degree of the effect of shareholding structure in decisions affecting their wealth and the welfare of their rms. In todays modern corporations, various forms of ownership exist. There are institutional ownership, managerial ownership, private and public ownership, family ownership, diverse and concentrated ownership, indigenous and foreign ownership and so on. Franks et al. (2003) report that among the best-established stylized facts about corporate shareholding is

Received 27 August 2008 Revised 23 January 2009 Accepted 28 January 2009

DOI 10.1108/14720701011051893

VOL. 10 NO. 3 2010, pp. 249-260, Q Emerald Group Publishing Limited, ISSN 1472-0701

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that ownership seems to be concentrated in few hands in most countries. They cite the work of Becht and Mayer (2001), which reports that in more than 50 percent of European companies there is a single voting block of shareholders that commands a majority of shares. In the case of US also, family rms constitute 80 percent of all business institutions, produce over 50 percent of all gross domestic product, and 65 percent of all wages paid (The Economist, 1996, p. 16, cited in Schulze and Dino, 1998). One key reason for this persistence in corporate ownership concentration could be the need to protect inventions and property rights and generally family inheritances. While concentration may be the main issue of discourse in the USA, Europe, Japan and China, the same cannot be said of Africa and some parts of East Asia. In these areas, corporate ownership literatures seem to focus more on indigenous/foreign ownership (Radman and Gullet, 1998; and Campbell, 2002), as well as public versus private ownership (Dewenter et al., 2001). At the same time, while family ownership persists in most countries because of inheritance and the need to protect family tiers, managerial ownership may have been popularized by the need for technical expertise and partnership. Unlike the case in developed economies, also, experiences in most developing economies show that within the last two decades, there have been several shifts and changes in corporate ownership. This is the case in Nigeria, where governments indigenisation and privatization policies since the 1980s tend to have polarized corporate ownership debates in the country. Specically, the privatization exercise was held to have made agency and cash ow problems more pronounced in the countrys corporate politics. On its own, the indigenisation policy was adopted by the Nigerian government to limit the level of foreign control in the Nigerian economy (Nigerian Enterprises Promotion Board, 1982, para 5; and Ejiofor, 1981, p. 15); and also to increase the role of government in economic management (Brownbridge, 1998). Taking into consideration the incessant level of government interference in corporation control in Nigeria, this paper aims primarily at investigating the role of corporate ownership in the nancing decisions of listed rms. The paper contributes signicantly to global knowledge by using data from a developing country with inefcient nancial markets and unstable corporate environment, to widen the scope of corporate capital structure and ownership debates around the world.

Review of related literature

Previous studies have strived to establish how various classes of corporate ownership inuence corporate decision-making. This is so especially as it concerns the relationship between corporate capital and ownership (Holderness, 2003; Ang et al., 2000; Coleman and Cohn, 1999; Morck and Nakamura, 1999; Schulze and Dino, 1998; Mohd et al., 1998; Friend and Lang, 1988)). Theoretically, the means by which control over funds is exercised inuences the method by which real investment is nanced, either for private individuals or institutional investors (King, 1977, p. 87). In the same vein, the sources from where corporate funds are generated equally constitute a strong basis for earnings distribution. Demonstrating how ownership structure affects nancing decisions, Glen and Pinto (1994, p. 4) argue along this line that in the emerging markets where the tradition of family ownership is strong, control can dominate the nancial decisions of rms; and that this can force affected rms to defer public issues of equity which dilute control, but which would also permit the rm to invest in growth opportunities. It is this tendency, according to Mello and Parsons (1998, p. 83), that make ownership structure an important determinants of corporate value and performance. A priori, ownership type is expected to have some degree of inuence on corporate nancing patterns. This is especially so in cases with government or institutions have signicant ownership/control stakes (Alami, 2005; and Li et al., 2006). Li et al. (2006) equally argue that on aggregate, the combination of ownership and institutional factors explains up to two to seven percent of the total variation in rms leverage decisions.

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The question of whether ownership structure affects leverage seems to have been addressed by the outcome of various empirical studies. Nevertheless, some of the answers offered by such previous studies stand contestable because they aggregated ownership as a single factor. Whereas others took note of the complexities in the types and classes of corporate ownership, especially across industries, sizes, countries and so on, resolutions arising there from still remain very contingent and dependent on changing conditions and assumptions. Our study is unique in that it examines ownership effects on leverage based on selected ownership classes; and because it makes used of a country case study based on an economy with harsh corporate operating environment and constrained capital market condition. Essentially, the theoretical basis for the ownership-leverage relationship is anchored mainly on the agency theory. This theory admonishes on the need to control managerial excesses, in order to avoid the pursuit of personal interests (Simerly and Li, 2000; Ang et al., 2000, and Demirguc-Kunt and Maksimovic, 1996). This view is supported by Drifeld et al. (2005) who argue that the relationship between ownership and capital structure is more predicated by the relationship between owners and managers because of the agency-related issues arising from borrowing. While it is acceptable that ownership inuences capital structure decisions, the degree and direction of such relationship remain contestable. While, for instance, Huang and Song (2002) empirically established that ownership structure does not have any signicant impact on rms capital structure, Pandey (2004, p. 87), using data from Malaysia, nds out that there is a signicant negative relationship between the total debt ratio and ownership structure is positive at 0.0867 The result of Pandeys work is contradicted by the outcome of the latter study by Mat Nor and Arifn (2006), who using the pyramid ownership and the concept of ultimate owner (OU), explain that the UO concept inuences the level of capital structure; and that the presence of the pyramid structure may lead to a leverage increasing phenomena. This, they argue, may eventually inuence the threat of nancial distress and bankruptcy. The latter nding is re-enforced by the outcome of another earlier study by Du and Dai (2004), which concludes that in the case of pyramidal afliated rms, the ultimate owners may sometimes intentionally raise leverage excessively for reason of maintaining control over the rm. This also is consistent with the study by Rajan and Zingales (1995), who reveal that the proliferation and pervasiveness of the pyramid structure, which accommodates the non-dilution eluting entrenchment effect of the ultimate shareholders and in turn leads to a higher corporate leverage. Arguments against the linearity relationship between debt and ownership are based on the fact that not only the equity holders have control over the affairs of the corporation. As demonstrated by Barclay and Smith (1995, p. 900), other types of corporate liabilities such as secured debt, ordinary debt and subordinated debt command rights to limit activities specied in covenants. There are also exerting inuences from ethical and regulatory requirements (as bounded in corporate governance mechanism) on the part of the managements of rms. Using rm-level country data, Wiwathanakantang (1999) shows that ownership structures and governance mechanisms have inuence on Thai rms debt policy choices. Kumar (2004) also nds that listed Indian rms with weaker governance mechanisms, and dispersed ownership structures, are associated with a high level of debt. In the same vein, the type and constituent of ownership structure in a rm is also another area of contest among capital structure studies. Mahrt-Smith (2005) focuses on the interaction between capital structure and ownership structure by particularly taking into consideration the concept of managerial discipline and managerial initiative. He arrives at some empirical predictions that equity ownership should be concentrated when debt is closely held, effective debt covenants are present, bankruptcy procedures and the institutional environment are creditor friendly, and board representation of lenders is commonplace. Another common area among the ownership-leverage debate is the claim that the capital structures of locally owned rms ought to vary with those of foreign owned rms, especially

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in developing economies. Li et al. (2006) empirically investigated this claim and established that foreign rms are not as highly levered as domestic rms and have longer debt maturity than other rms a result they explained should arise because foreign ownership brings in not only capital and technology but also modern management and better governance practices. In most cases, foreign rms would have more diversied access to capital than indigenous; and in some other instances, the guarantee and support accorded to indigenous rms by their governments may give such rms reasonable access to domestic markets for capital. This complication gives an indication that the direction of ownership-leverage relationship between foreign and local rms should depend on the nature the corporate environment. In the case of government and private ownership, a priori, the capital structure of rms owned by government should be different from those owned privately. As explained by Dewenter et al. (2001, p. 321), government rms cannot issue equity stock except as part of a privatization; hence, capital that is not internally generated or equity contributed by government can only be borrowed. They also argue further that government rms may enjoy implicit or explicit loan guarantees that enable then to borrow from the government itself at favorable rates. Deesomsak et al. (2004) argue likewise that government involvement in rms gives such rms more access to the capital market and an opportunity to borrow at favorable and government guaranteed rates. In contrast, however, Berger et al. (2004) nd that because private ownership stands the chance of according a rm better reputation and better relationship channels, such rm is better placed to obtain loans. This argument only holds in organized and competitive nancial markets. The extent of diversication in the ownership structure of a rm is another factor that is found to have some inuence on major corporation decisions. Ownership diversication creates opportunities for local participation in corporate decisions. Thus, the degree of diversication a rm faces inuences the extent of indigenous ownership and the quality of decisions in the rm. However, the level and structure of ownership concentration or dispersion varies across countries. While in some countries majority of corporate shareholding may be made up of governments and government agencies, in others, the top of the ladder may be occupied by nancial institutions/banks (Prowse, 1992, as the case in Japan). In some others also, majority shareholding may identiable with individual families (as is the case in the United States and China). The level of bank ownership in Japanese rms as replicated in Prowse (1992, p. 1123), shows that whereas in 1984 commercial banks held as much as 20.5 percent in Japan, they only held a mere 0.2 percent in the United States. Large shareholders have strong incentives to maximize rm value and can effectively raise corporate leverage as a way of forcing management team to pay out substantial amount of free cash ow (Du and Dai, 2004). An inherent advantage of concentrated ownership is that it provides incentives for monitoring the management (Kim, 2005). Hence, a positive relationship would normally exist between concentrated ownership and capital leverage. However, other researchers like Lins (2003) and Claessens et al. (2002) have argued instead that concentrated ownership may not tackle this agency problem, and may itself lead to opportunistic behavior on the side of the controlling shareholders. The issue is not just that separation of cash ow right (CFR) from control right (CR) induces excess borrowing. Other empirical studies have also shown how devastating the separation might be on the interests of other shareholders. Along this line, Mat Nor and Arifn (2006), collaborating the results of the works of Claessens et al. (2002), Lemon and Lins (2003), for instance, represent that the interest of other shareholders may be adversely affected whenever such divergent exist. The argument behind this, as they offered, is that such divergence enables the ultimate owners to exploit their control rights on the companys resources and be able to get away with it without being signicantly penalized for such conducts. This may result to a situation where such over-concentration of ownership in the hands of the few (called ultimate owners) may pose some monitoring difculties and agency problems as well. On their own, La Porta et al. (1999, p. 474) prescribe that when they retain substantial cash ow rights and control rights, the controlling shareholders face incentive to

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monitor managers and maximize prots. Away from this perspective, though, Jensen and Meckling (1976) demonstrate that the incentive to monitor managers (which might be available to an ultimate owner) is likely to retain the diversion of corporate resources by the controlling shareholders, and so enhance the value of minority shares.

Data and methodology

The primary aim of this paper is to investigate the nature, degree and direction of the effects of various classes of corporate ownership on capital structure decisions among rms. To achieve this, data spanning across 1990 to 2006 were extracted from the nancial statements of selected companies quoted in the Nigerian Stock Exchange. The nancial statements were sourced from the Federal Inland Revenue Board, the Corporate Affairs Commission (CAC), and the Nigerian Stock Exchange, which are incidentally legal depositories of nancial accounts of companies incorporated in Nigeria. The sampling processes excluded certain classes of rms. First were rms in the nancial services sector because, as argued by Pandey (2004, p. 84), such rms have nancial structures that are substantially different from those of non-nancial services rms. Next were rms that were moribund that is rms whose annual accounts and nancial reports were in arrears for three years as at December 2006. Also excluded were rms quoted in the Nigerian Stock exchange after 1990. Finally, the sample excluded smaller rms that were quoted in the second-tier market (that is the lower level of the Nigerian Stock Exchange). After adjusting for these factors, 71 out of a total of 192 quoted rms (as at December 2006) were nally selected for the study

The regression models

A panel xed effects estimation approach is adopted. Key variables used in the regression estimation include nancial leverage ratio as the dependent factor, as well as corporate ownership, rm size, protability and rm-age, as the independent factors. Among the independent variables, the proxies for corporate ownership serve as the exogenous variables, whereas the others are sued as the control variables. Using three book value measures of nancial leverage, three regression models are adopted in the study the specify relationship between each of the nancial leverage measures and the exogenous variables are as follows: TL=TA;ij a0 b1 OWN1;ji b2 OWN2;ji b3 LogSales;ji b4 PBIT=TA;ji b5 LogAge;ji mji; STD=TA;ij a0 b1 OWN1;ji b2 OWN2;ji b3 LogSales;ji b4 PBIT=TA;ji b5 LogAge;ji mji; LTD=TA;ij a0 b1 OWN1;ji b2 OWN2;ji b3 LogSales;ji b4 PBIT=TA;ji b5 LogAge;ji mji: 1

Drawing from the mathematical denitions adopted by previous studies on nancial leverage determinants, TL/TA i,j stands for the ratio of total liabilities to total assets, LTD/TA i,j is the ratio of long-term liabilities to total assets; whereas STD/TA i,j is the ratio of short-term liabilities to total assets, all for rm j in time i. In the same vein, OWN1i,j is an ownership dummy proxy that takes the value 0 if rm is foreign owned and 1 if locally owned; and OWN2 i,j is another ownership dummy proxy that takes the value 1 if rm has concentrated ownership and 0 if it has diversied. For the control variables, LogSales i,j is a proxy for rm size and equals natural logarithm of sales; PBIT/TA,ji is a proxy for protability and equals earnings before interest and tax divided by total assets; LogAge,ji is a proxy for rm-age and equals natural logarithm of number of years rm existed before incorporation; mji is the error term dened as mi nji ; and j and i respectively stand for each of the 71 sampled rms and each of the 17 years.

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Empirical results
The descriptive statistics reported in Table I of this paper show that listed companies in Nigeria, the average ratio of total debts to total assets is 70.6 percent. Out of this, short-term debts ratio constitutes about 64.6 percent, while long-term debt ratio is only 6.1 percent. This result simply gives an indication that majority of corporate investments in Nigeria are funded through short-term nancing sources. This situation is not unconnected with the apparent high level of nancing frictions in the countrys nancial markets, and the arising difculties associated with sourcing long-term capital through the markets. The descriptive results equally show that about 64.4 percent of listed non-nancial companies in Nigeria are locally owned whereas 35.6 percent are foreign owned. The ownership structure of 68.2 percent of the rms is concentrated in few hands, while 31.8 percent of the rms have diversied ownership structure. The result provides some descriptive evidence that most publicly quoted rms in Nigeria have concentrated on ownership structure, and are at the same time dominated by local ownership. At an annual average of 9.1 percent, the earnings ratios of the rms can equally be considered relatively very low. When compared across ownership groupings, the results equally reveal that the nancing features of rms with diversied ownership are almost same with those with concentrated ownership structures. The resultant statistics shown in Table II, for instance, indicate that while the average total debts to total assets ratio of diversied rms is about 63.2 percent, and that concentrated rms is about 75.6 percent. The short-term debt ratios of these ownership groupings are respectively 57.5 percent and 69.2 percent, while the long-term debt ratios are also respectively 5.7 percent and 6.4 percent. With a difference of 12.4 percentage point, rms with concentrated ownership in Nigeria can be said to be more Table I Summaries of basic descriptive statistics on the whole sample
Variable Total debt ratio Short-term debt ratio Long-term debt ratio OWN1 OWN2 Firm size Protability Firm age No. of observations 1,123 1,123 1,123 1,198 1,194 1,143 1,125 1,205 Mean 0.706 0.646 0.061 0.644 0.682 3.015 0.091 1.504 Standard deviation 1.771 1.714 0.169 0.471 0.466 0.897 0.220 0.187 Min. 0.000 0.000 0.000 0.000 0.000 20.523 22.400 0.778 Max. 51.800 50.943 3.575 1.000 1.000 5.103 1.875 1.919 Skewness 23.707 24.582 10.489 20.600 20.780 20.112 21.684 20.858

Table II Summaries of basic descriptive statistics on the different ownership classes

Statistic Entire sample Mean Standard deviation Foreign rms Mean Standard deviation Local rms Mean Standard deviation T-test result Concentrated rms Mean Standard deviation Diversied rms Mean Standard deviation T-test result Total debt ratio Short-term debt ratio Long-term debt ratio Firm size Protability Firm age

0.706 1.771 0.581 0.259 0.843 2.575 0.514 0.756 2.233 0.632 0.361 0.264

0.646 0.714 0.523 0.236 0.777 2.494 0.515 0.692 2.164 0.575 0.327 0.257

0.061 0.169 0.058 0.143 0.066 0.199 0.179 0.064 0.199 0.057 0.107 0.158

3.015 0.893 3.200 0.879 2.732 0.838 22.221* 2.892 0.874 3.154 0.876 21.181

0.091 0.220 0.130 0.193 0.051 0.246 1.402 0.07 0.224 0.124 0.216 20.962

1.500 0.187 1.534 0.161 1.469 0.196 21.430 1.491 0.198 1.518 0.164 20.567

Notes: * T-values are signicant at 5 percent level

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levered than those with diversied ownership. However, with an arising difference of 11.7 and 0.7 percentage points, the former respectively make more use of short-term and long-term debts than the latter. Results on size reveal that rms with diversied ownership structures (with an index of 3.153) are relatively larger than those with concentrated ownership structures with an index of 2.892. In the main, the results of the t-test, reported also in Table II, show that the above-recorded differences between the mean values of the two ownership categories are not signicant. The above situation is not the case in the second ownership classication. Based on the reported statistics, locally owned rms are comparable more levered than foreign owned ones. While, for instance, the average total leverage ratio of local rms is about 84.3 percent, those of foreign rms in the country are about 58.1 percent. This is not unusual at least when considered that foreign rms have more access to international nancing sources than their local counterparts. In the two cases, majority of the total debt nancing arises from short-term sources. Of the 84.3 percent of total leverage ratio of local rms, 77.7 percent is of short-term, whereas 52.3 percent of that of foreign rms is also of short-term. The average protability ratios of the two classes equally reveal that foreign rms are more protable, with a ratio of 13.0 percent, than the local ones that have just an average of 5.1 percent. The results also show that, in Nigeria, foreign rms are averagely larger in size than local rms. However, outside the signicant difference in the average sizes of local and foreign rms, as represented by the t-value, the differences in the mean values of the three measures of debt and the other exogenous factors do not seem to be signicant. This leaves room for further empirical investigation on whether the impact of the acclaimed determinants of nancial leverage actually varies according to rms ownership structure. A correlation matrix of the nancial leverage measures and the exogenous variables, as presented in Table III, equally reveals that, at 98.5 percent and 51.2 percent respectively, the narrow debt measures (short-term- and long-term debts ratios) have signicant positive correlation with the broad measure of nancial leverage. At the same time, the short-term debt measure is positively correlated with the long-term debt measure at 35.5 percent. Although the study does not take into account incidences of joint correlation among the variables, the two proxies of rm ownership have positive correlation with the three measures of nancial leverage adopted; while rm age, size and protability (each) have negative correlation also with the three classes of nancial leverage measures. On the other hand, both proxies of ownership have negative correlation with each of the controlled variables used in the estimation. Protability is found to be negatively related to rm age, but positively correlated with rm size. This leaves some suspicion that larger and relatively younger rms are more protable than smaller and relatively older rms. The suspicion is not however unusual considering that in the Nigerian case, infrastructural deciencies and poor technological applications are prevalent a tendency that makes the operating environment very difcult for most rms.

Table III Correlation results on the relationship among the estimation variables
Total debt ratio Total debt ratio Short-term debt ratio Long-term debt ratio Firm size Protability Firm age OWN1 OWN2 1.000 0.985* 0.512* 0.036* 20.267* 20.039 0.053 0.044 Short-term debt ratio Long-term debt ratio Firm size Protability Firm age OWN1 OWN2

1.000 0.354* 0.029 20.284* 20.021 0.041 0.043

1.000 0.047 20.032* 20.105* 0.083* 0.022

1.000 0.087** 0.431** 20.385 20.103

1.000 20.037 20.048 20.078**

1.000 20.244 20.180

1.000 20.058

1.000

Notes: * Signicant at 5 percent level; ** signicant at 1 percent level

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The sample frame for our study is made up of rms of differing sizes, industrial characteristics and structural characteristics. The sampled rms also differ in terms of their respective number of observations, mostly because of the few incidences of missing data recorded for some of the years. To resolve the problems that usually arise from this level of heterogeneity, a panel estimation approach is adopted. In line with ndings of previous studies, there is always a likelihood of both xed effects and random effects in most panel estimations. As a result, the Hausman test technique is applied to resolve the arising challenges. With a test value of 39.89 and an associated probability of 0 percent (see Table IV), the null hypothesis that the difference in the coefcients of the variables is not systematic is rejected thus, the choice of a xed effect approach. Findings from the xed effects model show that the rst ownership proxy (OWN1) has a signicantly positive relationship with the level of total debt. Consistent with the descriptive results earlier reported in Table II of this paper, the result is interpreted to mean that rms with dominant local ownership carry more total debt than those with dominant foreign ownership. It however contradicts the earlier ndings of the work of Li et al. (2006), which established that because foreign rms bring in capital, technology, modern management and better governance practices, they ought to be more levered than their local counterparts. The results with the second proxy of ownership (OWN2, i.e. whether rm has diversied or concentrated ownership) are also positive, but not signicant. The non-signicant nature of the variable shows that such is not characteristically a major determinant of corporate nancial leverage in Nigeria. Nevertheless, the positive coefcient is consistently in line with one of the major arguments for corporate ownership concentration that is the quest to protect the rm from ownership dilution. To continue to protect themselves against diffusion, rms may prefer to make more use of equity and internal capital. The result is also conforms with the agency theory and the empirical results of Friend and Lang (1988), Kim (2005) and Bris and Welch (2005) which considers that ownership structure that widens the gap between managers and shareholders exposes rms to using more debt capital (Table V). On the other determinant variables, the results equally reveal that rm size and protability are each signicantly and negatively related to nancial leverage, while the relation with rm age is signicant and positive. The results here are very consistent with the pecking-order theory, and imply that larger rms use less total debts than smaller rms; and that more protable rms use less debts than less protable ones. However, the results disagree with the tradeoff theory which emphasizes that protable rms would normally borrow more to earn some tax advantage. This can also be explained to mean that rms that are more protable may have higher internal nances to peck on; and may not be disposed towards Table IV Estimated coefcients for both the xed and the random effects models
Within-groups (xed effects model) (1) OWN1 OWN2 Firm size Protability Firm age Chi-square Prob . chi-square 0.204* (2.530) 0.031 (0.340) 20.277* (23.390) 20.948* (26.550) 2.911* (5.820) Generalized least square (random effects model) (2) 0.156* (2.260) 0.027 (0.450) 0.034 (0.750) 21.164* (28.570) 0.353 (1.270) Difference (1) (2) 0.033 20.005 20.3352 0.248 2.745 39.890 0.000

Notes: * Signicant at 5 percent level of signicant; H Chi 2(5) (b 2 B)[(V_b V_B)L(21)](b 2 B), where H is a constant vector; b and B are respectively the xed effect and the random parameter estimates

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Table V Results of OLS xed effects

Endogenous variable: TDR Equation 1 Constant OWN1 OWN2 Firm size Protability Firm age R-square Within Between Overall F-test Prob . F No. of observations 22.939 (24.660)* 0.204 (2.530)* 0.031 (0.340) -0.277 (23.390)* 20.948 (26.550)* 2.911 (5.820)* 0.097 0.039 0.002 22.10 0.000 1,102 Endogenous variable: STDR Equation 2 22.516 (24.340)* 0.166 (2.230)* 0.028 (0.330) -0.237 (23.150)* 20.968 (27.270)* 2.528 (5.490)* 0.104 0.020 0.007 23.70 0.000 1,102 Endogenous variable: LTDR Equation 3 20.423 (23.490)* 0.038 (2.460)* 20.003 (0.190) 20.040 (22.550)* 0.021 (0.740) 0.383 (3.980)* 0.019 0.131 0.014 4.03 0.001 1,102

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

using more debt nances. The Nigerian case, where unfavorable nancial market conditions (such as high interest rates, poor legal protections and dearth of long-term investible funds) impose extra burdens on borrowers and make the costs of external capital very exorbitant, provides a vivid illustration of this resolution. On the other hand, the results on rm age give some indication that, consistent with the reputation hypothesis, older rms rely more on debt nances than relatively younger rms; and so rms that have long-running nancing relationship with creditors may be most favored even at a time of credit squeeze. The xed effect regression equations with short-term debt measure as the dependent variable show exactly the same results as with the total debt measure. The signs and signicant of the variables are almost exactly the same. This indicates that the determinants of total debt nancing are the same with that short-term debt nancing in Nigeria. The nding is not surprising especially considering that as much as 90.92 percent of the total debt nancing of rms is in short-term. With the exception of protability, which have negative signicant coefcient with total debt and short-term debt measures and a positive non-signicant coefcient with long-term debt measure, other factors that are found to be the determinants of total and short-term debt measures are also the determinants of the long-term debt measure of nancial leverage. The non-signicant relationship between protability and long-term debt measure implies that protability might positively inuence long-term borrowing; it does not seem to inuence much long-term nancing decisions of rms. The results between rm size and nancial leverage conform with the earlier ndings of Padron et al. (2005) and Rajan and Zingales (1995), as reviewed in the literature part of this paper. There are however some contradictions between the ndings here and the resolutions of other works such as Faulkender and Petersen (2006), Cooley and Quandrini (2001), Graham (2000), and Titman and Wessels (1988). Additional explanation to the negativity of the relationship between size and leverage could be drawn from the empirical evidences arising from the use of Nigerian data. Given the undeveloped and very inefcient nature of the Nigerian nancial markets, it is possible that larger rms that have built enough reserves may choose to nance their operations through their respective internal markets, rather than passing through the difculties inherent in accessing the external nancial markets. This impression is supported by other empirical results from Desai et al. (2004) and Li et al. (2006) who both resolve that larger rms are nanced with less external debts in countries with undeveloped capital markets or weak creditor rights.

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Conclusion
The politics of corporate ownership have continued to inuence not only corporate decisions, but also how rms relate with their stakeholders. Whereas government policies, for instance, may discriminate between foreign and local rms in most countries, the actions of major shareholders (ultimate owners) may be seen and explained from the point of view of the need to avoid control diffusion. These tendencies create problems in some key corporate decision areas. This paper specically examines how local ownership of rms inuence capital structure decisions in Nigeria. It nds, among others, that: the discrimination between indigenous and foreign rms is a major determinant of nancial leverage in the country; local rms carrying more total debts than foreign rms; and foreign rms and diversied rms, respectively, are larger in size, more protable and more matured, and rely much on long-term nancing. The ndings generally show that the consistency of empirical results and capital structure theories across country studies depends, rst, on the dominant nature of corporate ownership structure in each country; and secondly, on the level of nancial market development. In the case of Nigeria, local ownership is found to be prevalent among majority of the rms. Access to the capital market is also highly inadequate thus leading to a situation where most of such rms rely more short-term debts and internal capital. Under this condition, rms conform only to those nancial theories that support short-term nancing practice. Essentially, this study reveals the inherent reasons for the differences in the funding patterns of quoted rms across various corporate ownership models. It provides necessary platforms, especially to corporate managers, for aligning nancing decisions and ownership structure to other structural characteristics such as size, age, and protability. Undoubtedly, an attempt to widely generalize the results here may be hampered by the relatively sample size of the study. With data from just a country, the robustness of the country-, time- and company- effects may not have been fully captured in the estimation process. It would be good, therefore, for further studies to consider ownership dynamisms and nancial leverage decisions across major African countries.

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Ferri, M.G. and Jones, W.H. (1979), Determinants of nancial structure: a new methodological approach, The Journal of Finance, Vol. 34 No. 3, pp. 631-44. Gupta, M.C. (1969), The effect of size, growth, and industry on the nancial structure of manufacturing companies, The Journal of Finance, Vol. 24 No. 3, pp. 517-29.

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

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