Leverage and Corporate Financial Distress in Nigeria: A Panel Data Analysis

  • Lucky Anyike Lucky Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria
  • Agilebu Ogechi Michael Department of Banking and Finance, Rivers State University, Port Harcourt, Nigeria
Keywords: Leverage, Corporate Financial Distress, Nigeria, Panel Data Analysis

Abstract

This study examined the effect leverage on corporate financial distress of quoted manufacturing firms in Nigeria. The objective is to examine if financial leverage have any effect on financial distress of the Nigeria firms. Cross sectional data was sourced from financial statement of ten quoted manufacturing firms. Z-Score and Changes in operating profits was proxy for corporate financial distress while debt equity ratio, short, long term debt and total debt to total assets were proxy for leverage. After cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model.  Findings reveal that financial leverage have positive effect on financial distress measured by the z-score while total debt ratio and debt equity ratio have positive effect on financial distress measured by changes on operating profits while  short term debt and long term debt have negative effect on operating profits. From the regression summary, the study concludes that leverage have significant effect on corporate financial distress. We recommend that Financial structure of the manufacturing firms ought to be adequately planned to safeguard the interest of the equity holders, shareholders and financial requirements of the firm and the firms should formulate policies of increasing its equity capital as oppose to debt and that Implementable investment policies should be formulated and the business environment should be well examined. Recognizing faults of investment might be paramount to develop the business’s financial performance, since it specifies the loopholes which corrective decision can be applied.

References

Altman, E. (2016). A further empirical investigation of the bankruptcy cost question. Journal of Finance 39, 1067–1089.

Altman, E. (2000). Corporate Financial Distress and Bankruptcy, 3rd edition.

Altman, E., Hotchkiss, E. (2005). Corporate financial distress and bankruptcy: predict and avoid bankruptcy. Analyze and invest in distressed debt 3rd edition. New Jersey: John Wiley & Sons.

Andrade, G., Kaplan, S. (1998). How costly is financial (not economic) distress? evidence from highly leveraged transactions that became distressed. The Journal of Finance, 53(5), 1443-1493.

Asquith, (1994). Anatomy of financial distress: An examination of junk bond issuers. Quarterly Journal of Economics 109, 625–658.

Beaver, W. (1966). Financial ratios as predictors of failure. In Journal of Accounting Research, 5, 71-111.

Bebchuk, L. (2002). Ex-ante costs of violating absolute priority in bankruptcy. Journal of Finance, 57(1), 445-460.

Brown, D., James, C., Mooradian, R. (1992). The information content of distressed restructurings involving public and private debt claims. Journal of Financial Economics, 33, 93-118.

Celli, M. (2015). Can z-score model predict listed companies’ failures in Italy? An empirical test. International Journal of Business and Management, 10(3), 57-69.

Chava, S, (2004). Bankruptcy prediction with industry effects. Review of Finance, 8(4), 537–569.

Fich, E. M. (2008). Can corporate governance save distressed firms from bankruptcy? An empirical analysis. Review of Quantitative Finance and Accounting, 30(2), 225–251.

Gilbert, L, (1990). Predicting bankruptcy for firms in financial distress. Journal of Business Finance & Accounting, 17, 161-171.

Grice, J. S. (2001). Tests of the generaliz-ability of Altman’s bankruptcy prediction model. Journal of Business Research, 54(1), 53–61.

John Wiley & Sons, Hoboken, NJ. Andrade, Gregor, and Steven N. Kaplan, (1998). How costly is financial (not economic) distress? Evidence from highly leverage transactions that became distressed. Journal of Finance 53, 1443–1493.

Kwak, W, (2005). Multiple criteria linear programming data mining approach: An application for bankruptcy prediction. Data Mining and Knowledge Management, 3(1),164–173.

Li, W. G. (2014). Corporate Financial Distress and Bankruptcy Prediction in the North American Construction Industry. Data Mining and Knowledge Management, 3(1), 164–173.

Lucky, A. L., (2017). Cost of capital and corporate earning of quoted firms in Nigeria: A Multi-Dimensional Analysis of quoted firms in Nigeria. Australian journal of finance and banking review, 1(1), 41-65.

Majumdar, S.K., & Chhibber, P., (1999). Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance. Public Choice, 98 (3), 287- 305.

Matt, H.E., (2000). Excellence in financial management. Course 1: Evaluating Financial Performance.

Modigliani, F. and Miller, M.H., (1963). Corporation income taxes and the cost of capital; A correction. American Economic Review, 5(3), 433-443.

Modiglini, F., & Miller, M., H.,(1958). The cost of capital, corporate finance and the theory of investment. American Economic Review 4(8), 261-297.

Onaolapo, A.A., & Kajola, S.O., (2010). Capital structure and firm performance: Evidence from Nigeria. Journal of Economics, Finance and Administrative Sciences, 25, 70- 82.

Opler and Sheridan Titman, (1994). Financial distress and corporate performance. Journal of Finance 49, 1015–1040.

Pandey, I.M ., (2010). Financial Management. 10th ed; New Delhi: Vikas publishing House PVT Ltd.

Platt H. D.(2002). Predicting corporate financial distress: reflections on choice-based sample bias. Journal of Economics and Finance, 26(2), 184–199.

Shen, C.-H, (2010). The prediction of default with outliers: Robust logistic regression. Handbook of Quantitative Finance and Risk Management,7(2), 965–977.

Singhal, R, (2013). Bankruptcy risk, costs and corporate diversification. Journal of Banking & Finance, 37(5), 1475–1489.

Skeel, (2004). The past, present, and future of debtor-in-possession financing. Cardozo Law Review 25, 1905–1934.

Stiglitz, (1974). On the irrelevance of corporate financial policy. American Economic Review 64, 851–866.

Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 4(3), 1-19.

Weiss, A. (1988). Information problems, conflicts of interest, and asset stripping: Chapter 11’s failure in the case of Eastern Airlines. Journal of Financial Economics 48, 55-97.

Zeitun, R.& Tian, G.G. (2007). Capital Structure and Corporate Performance: Evidence from Jordan. Australian, Accounting, Business and Finance Journal, 1(4), 40- 53.

Published
2019-08-10
How to Cite
Lucky, L. A., & Michael, A. O. (2019). Leverage and Corporate Financial Distress in Nigeria: A Panel Data Analysis. Asian Finance & Banking Review, 3(2), 26-38. https://doi.org/10.46281/asfbr.v3i2.370
Section
Original Articles/ Review Articles/ Case Reports/ Short Communications