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Firm size and corporate nancial-leverage choice in a developing economy


Evidence from Nigeria
Abel Ebel Ezeoha
Department of Banking and Finance, Faculty of Management Sciences, Ebonyi State University, Abakaliki, Nigeria
Abstract
Purpose The purpose of this paper is to investigate, from an undeveloped market perspective, the nature and signicance of rm size as a determinant of corporate nancial leverage. Design/methodology/approach A panel data xed-effects regression model is used to estimate the relationship between nancial leverage and rm size, while controlling also for the effects of other acclaimed determinants like asset tangibility, protability and rm age. The dataset used covers 71 rms quoted in the Nigerian stock markets over a 17-year period (1990-2006). Findings The study reveals that as much as 91.4 percent of the total nances of Nigerian-quoted rms is of short-term liabilities, with just 8.6 percent constituting long-term liabilities. It nds that rm size is negatively and signicantly related to nancial leverage. Controlling for some other determinants, the arising results tend to conrm an over-bearing inuence of the pecking order theory in the nancing patterns of Nigerian-quoted rms by revealing that the relationship between protability and nancial leverage is highly signicant and negative; and that rm-age is positively and signicantly related to nancial leverage. Originality/value Using data from a country with undeveloped and inefcient nancial markets, this paper provides an important insight on the international debate on the effects of size on corporate decisions. Keywords Business development, Gearing, Developing countries, Nigeria Paper type Research paper

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Introduction The size of a rm plays an important role in determining the kind of relationship the rm enjoys within and outside its operating environment. The larger a rm is, the greater the inuence it has on its stakeholders. Again, the growing inuences of conglomerates and multinational corporations in todays global economy (and in local economies where they operate) are indicative of what role size plays within the
This paper is an output of the authors Phd dissertation at the University of Nigeria. The author is grateful to Professors Francis Okafor and Chibuke Uche for their excellent supervision; to the Doctoral students participants at the 2007 Financial Management Association Doctoral Student Seminar in Spain for their useful comments; to the American Finance Association and the Allied Social Sciences Association for granting him the sponsorship and opportunity to participate at their January 2007 Annual Meeting and conference in Chicago USA; and to the participants at the September 2006 UNISA/UN Global Compact Symposium on Corporate Citizenship for their useful comments. He also appreciates the excellent revision offered by Boniface Eze and the anonymous referee.

The Journal of Risk Finance Vol. 9 No. 4, 2008 pp. 351-364 q Emerald Group Publishing Limited 1526-5943 DOI 10.1108/15265940810895016

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corporate environment. Refocusing the importance of size in corporate discourse, Kumar et al. (2001) argue that an interesting aspect of economic growth is that much of it takes place through the growth in the size of existing organizations. They cite Rajan and Zingales (1995) whose study in the sample of 43 countries show that two-thirds of the growth in industries over the 1980s, comes from the growth in the size of existing establishments, while only one-third trickled in from the creation of new ones. As the popularity of corporate size phenomenon continues to rise within the external business environments, more attentions are being pushed to its real effects on the internal structures of corporations and the specic impact on the relationship between the rm and its key stakeholders. One of the most popular areas where the inuence of rm size has been much queried is the area of practice of corporate nance. Graham and Harvey (2002), for instance, through their survey, sort the views of about 392 chief nancial ofcers from about 4,440 rms on the current practice of corporate nance. Results of the survey show that rm size signicantly affects the practice of corporate nance. In the same vein, a survey by the International Finance Corporation also focused on the nancing patterns of private enterprises in China, with a revelation that the relative importance of different sources of nancing among surveyed rms depends on rm size, with informal sources tending to become less important as rms grow larger. Emerging issues in the whole debate suggest that the impact of size on nancial leverage may actually depend on the level of nancial markets development in a particular country. Beck et al. (2005) for instance, studied whether the effect of corruption, nancial and legal obstacles on rms growth varies across rms of different sizes. They up with some ndings that the extent to which nancial and legal underdevelopment and corruption constrain rms growth depends very much on a rms size (p. 170). According to Li et al. (2007) also, large economies benet rms of different sizes, especially small rms, in assessing long-term loans, whereas fast-growing economies only increase the access of large and medium rms to long-term debt. This study, considering the peculiar economic characteristics of most developing countries and using data from Nigerian-quoted companies, primarily aims at investigating the actual effects of rm size on the nancial leverage of rms in a developing economy. Incidentally, size is an important distinguishing factor between developed and developing economies since what constitute a very small rm in the former might, in the later, be a very larger rm. The Nigerian case is an interesting and peculiar one, considering the fact that researches are yet to capture the sweeping impact of such government programs like privatization and persistent nancial systems reforms on the modus of business operations. Review of related literature Corporate size seems to be one of the most theorized determinants of nancial leverage. In effect, the relationship between size and nancial leverage has been explained by virtually all the mainstream capital structure theories (Schoubben and van Hulle, 2004, p. 595). At the same time, recent studies on corporate capital structure continue to test the validity of the earlier hypotheses on the relationship existing between the two variables. In general, most theoretical and empirical arguments seem to focus on the relationship between the capital structures of smaller rms and those of larger rms. There is however, much theoretical contention over which of the two carries more debts. On the theoretical side, while the pecking-order hypothesis upholds

the negative linearity between size and leverage, the tradeoff theory seem to have proposed otherwise. Schwartz and van Tassel (1950, pp. 412-13) are among the earliest researchers to empirically conrm the positive relationship between size and leverage. These men contend otherwise that the small corporation can and does obtain most of the funds it needs from the owner-managers (internal equity); and that high cost of registering and issuing stocks and bonds limit the capacity of small- and medium-sized corporations to access the capital market. Both Titman and Wessels (1988, p. 6) and Coleman and Cohn (1999) expand this position when they stressed the exorbitances in cost of issuing debt and equity securities. They asserted that this situation is directly related to rm size and in turn may force small rms to tilt towards the use of, mostly, short-term debts. In the case of business start-ups, which are know to be relatively smaller at inception, Huyghebaert (2006, p. 307; 2007, p. 105) posited the non-historicity of such businesses and, consequently, their lack of an established relationship with banks and funds suppliers that could have guaranteed them access to other forms of capital. Among the factors that have been used to support the positive linearity arguments include the fact that larger rms are more diversied; they have higher capacity to meet up with interest payments, and are more diversied than smaller rms (Pandey, 2004, p. 84; Cardone-Riportella and Cazorla-Papis, 2001). Such companies are also found to have been enjoying higher degree of information disclosure (Fama and Jensen, 1983; Rajan and Zingales, 1995), and they have higher collateral values and lesser bankruptcy risks (King, 1977). All these factors are argued by the above-cited researchers to have created more leverage opportunities to larger rms over smaller rms. The theoretical relationship between size and investments again may help to explain why, a priori, large rms seem to be more leveraged. Large rms supposedly ought to have higher investment opportunities (and so should also have higher need for cash) than smaller rms (Gonenc, 2005; Dittmar, 2004, p. 12). Central to the above general positions is the truth that as a rm grows in size, its ability to borrow increases, and so, its debt-equity ratio increases concurrently. Within the circuit of small rms, need for funds may be limited by the fact that their scales of operations are also limited. Consequently, not only would banks and investors alike be afraid of committing funds in the projects of small businesses, the small rms themselves may be indisposed to exposing themselves to risks associated with distress and bankruptcy, as well as loss of ownership. The above assertion that size directly relates to nancial leverage has not been without some dissenting views. As opposed to the static trade-off theory, size may have a positive impact on low- and moderate debt-ratios but a negligible or even zero impact on rms with high-debt ratios (Fattouh et al., 2002). It may be this time series reaction that has given rise to the other side of the argument that size is negatively related to nancial leverage. As for the pecking order hypothesis, Drobetz and Fix (2003), Fama and French (2002), Cosh and Hughes (1994), Erickson and Trevino (1994) and Baskin (1989) are among researchers that investigated and reafrmed the validity of the pecking order theory by examining the relationship between size and leverage. The strong empirical and theoretical evidence on positive linearity (of size) with the strong theoretical explanations offered by Rajan and Zingales (1995), Mat Nor and Arif (2006) and Titman and Wessels (1988) among others, that size and leverage are negatively correlated, may also be compared. According to Rajan and Zingales (1995, p. 453), large rms may favor equity nancing than debt nancing due to the relativity

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of the cost of equity nancing owing to asymmetric information which is small for such rms. Such rms may also be enjoying some reputation advantage among prospective investors especially, as a result of their consolidation in the industry/market. Therefore, they may prefer to exploit this opportunity instead of approaching the more expensive bank lending or other covenant-prone capital market debt instruments. Other supporters of the negative linear relationship between size and leverage are Cooley and Quandrini (2001), who nd that smaller and younger rms pay fewer dividends, take on more debt, and comparatively invest more than relatively large rms. Others are Mat Nor and Arif (2006) and Berger and Udell (1994) whose studies reveal more often than not, that small rms do fall back heavily on bank loans for their nancing requirements and become heavily indebted than larger companies. Faulkender and Petersen (2006), Bevan and Danbolt (2002), Titman and Wessels (1988), and Marsh (1982) equally support the conclusion that size and nancial leverage have negative relationship because, large rms have more access to equity funding than small rms. Faulkender and Petersen (2006, p. 59) specically demonstrate that by a very wide magnitude, larger rms are less levered, with an increase in market value. This value ranges from a 25th to 75th percentile and has the ability to lower rms leverage by an almost 3 percentage point. Drobetz and Fix (2003), also nd that large rms are more closely observed by analysts and should therefore be more capable of issuing information-sensitive equity, and have lower debt. It is worthwhile to state that the effect rm size has on leverage depends equally on the level of nancial markets development within an economy. Li (2005) make clearer the implications of this condition. The results of their work interestingly demonstrate that large economies benet rms of different sizes, especially small rms, to access long-term borrowing. Fast-growing economies only increase the access of large and medium rms to long-term debt. This important nding suggests that regional economic development might hurt small rms access to long-term nancing. In the case of banking industry consolidation, for instance, a good number of similar studies across nations, including those of Berger et al. (1999), di Patti and Gobbi (2007) and Walraven (1997), resolve that to a large extent, consolidation reduced small scale lending among banks. It does not make practical sense, anyway, to conclude that size simultaneously maintains both negative and positive relationship with nancial leverage. Neither does it make sense to conclude that the ndings of previous works are contextually wrong; nor that empirical and theoretical reasoning on the subject are based on conventions and expectations for general practice. It cannot also be argued that size and leverage are not correlated in any manner. In practice, essentially, rm-size constitutes an important consideration for corporate nancing. Where then are the sources of this mirage of differences? One possible reason for the divergences could be the adoption of varying denitions of rm size in the studies reported herein. For instance, Pandey (2004) whose work is relatively current in the area uses logarithm of total assets as a measure of corporate/rm size. While, he accepts total assets as good measure of size, Huang and Song (2002) do not completely agree on the use of logarithm of total assets. They, instead, choose to make use of the absolute values of total assets or the logarithm of sales as better measures of size, because according to them the two are highly correlated with a coefcient of 0.79. They go further to explain that the use of logarithm of sales is called for because of the fact that

size effect on leverage is nonlinear. Another possibility, as earlier argued by Homaifar et al. (1994), could be the inability of past empirical studies to clearly separate the short-run relationship between leverage and its determinants from its long-run relationship factors they say make the value of prior empirical evidence on capital structure questionable. Another important point to note is the growing assumption that the inuence of size on leverage may vary across countries. Barbosa and Moraes (2003), for instance, cite Tamani (1980) as the rst seeming study to investigate the effects of size on nancial leverage across countries with particular interest on identifying patterns distinguishing very small rms from their large counterparts. They represent the major ndings of the Tamani study to include: that nancial leverage varies across size than across countries; that small rms rely more on short-term nancing borrowed from trade and other non-bank creditors, and has the tendency to nance long-term assets with short-term funding relative to big enterprises. As argued by Li (2005), large economies benet rms of different sizes, especially small rms, in accessing long-term borrowing; with fast-growing economies only increasing the access of large and medium rms to long-term debt. These men reiterate the importance of their ndings, which suggest that on average, regional economic development might hurt small rms access to long-term nancing. In general, rms in developing countries may have less long-term debt than rms in developed countries simply because they have different characteristics, rather than necessarily implying a deciency in the credit market c (Caprio and Demirgu -Kunt, 1997). In the case of Nigeria, the inuence of size in the corporate environment cannot be overemphasized. In line with the earlier stance of Laudadio (1963), banks in the country are also found to be discriminatory in terms of interest charges on loans between high-net worth customers and small borrowers. While, it is customary for banks to lend to the former on prime rates, the maximum rates are applicable to lending to small borrowers and other customers (Bakare, 2004, p. 173; CBN, 1995, p. 5). The high cost of accessing the capital market and the attended conditions also seem to favor large rms more than small rms. Easterwood and Kadapakkam (2001, p. 50) offer some explanation on why it may be difcult for small rms with small capital issues to approach the capital market for funds. According to them, public offerings are associated with signicant issue costs such as fees for SEC registration, listing, trustees, investment bankers, and printing. They go further to argue that rms with large issues have more viable access to public markets, because they can spread the xed component of issue costs over the larger volume. This is an interesting factor considering that in Nigeria, the average costs of primary market issues is 6 percent (Securities and Exchange Commission, 2004). The above situation, however, has more theoretical backing than empirical convictions. The actual impact of size on corporate borrowings remains yet to be established in the cases of most developing economies. With the exclusion of banks and other nancial institutions among quoted rms in the Nigerian Stock Exchange, for instance, the total market capitalization has remained epidemically low standing at just 46.6 percent of the total market capitalization in 2006 (The Nigerian Stock Exchange, 2006). This is an indication of an averagely low participation of non-nancial rms in the equity market. The situation is not worse with the equity market. Almost, the same is applicable in the debt market. For instance, there is

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growing apathy among Nigerian banks in nancing activities in the real sectors of the economy (Ezeoha, 2007a, b, pp. 164, 193). One of the major goals of this study therefore is to establish some empirical bases for balancing empirical results of previous works that used data from developed economies. Data and methodology This study focuses on empirically analyzing the impact of rm size on corporate nancial leverage. The data used in the analysis are generated from nancial reports of the quoted Nigerian companies between 1990 and 2006. By implication therefore, the research relies on panel data techniques. Based on the same reasons offered by previous researchers, the dataset excludes rms in the nancial and second tier sectors of the Nigerian stock market. According to Pandey (2004, p. 84), the nancial characteristics and use of leverage in such sectors are substantially different from other companies. Also excluded are non-performing rms dened here as those whose annual reports and accounts are in arrears for the past three years (since 2003); and rms quoted in the Nigerian Stock Exchange after 1990. Consistent with the xed-effects hypothesis, the study adopts the panel xed-effects regression technique, with nancial leverage serving as the dependent variable, while the independent variables include selected rm-specic characteristics. Sources of data The study makes use of dataset generated from balance sheets and income statements of quoted companies in Nigeria. The arising data are sourced from the Federal Inland Revenue Board, the Corporate Affairs Commission, and the Nigerian Stock Exchange. These sources are, incidentally, legal depositories of nancial statements of companies incorporated in Nigeria. Population and sample size As at the time of the study, there were 192 quoted nancial, non-nancial and second tier rms in the Nigerian Stock Exchange. However, after adjusting for the factors mentioned above, 71 quoted rms are nally selected for the study. Consequently, 1,207 observations from 71 rms over a 17-year period (1990-2006) constitute the sample of the study. Key variables used in the regression estimation include rm size and nancial-leverage ratios, with protability, rm-age and asset tangibility as control variables. In the regression estimation equation, nancial leverage serves as the dependent variable, while the others constitute the independent variables. Three measures of nancial leverage short-term debt, long-term debt, and total debt measures (as represented in equations 1-3 below) are adopted: Financial Leverage FL Total Debt=Total Assets TD=TA Financial Leverage FL Short 2 term Debt=Total Assets STD=TA Financial Leverage FL Long 2 term Debt=Total Assets LTD=TA 1 2 3

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The relationship between nancial-leverage measures, as dened above, and the explanatory variables is estimated thus:

TD=TA;i; j ai b1 LogSales;j;i b2 FA=TA;j;i B3 EBIT=TA;j;i b4 LogAge;j;i 1;j;i STD=TAj;i ; ai b1 LogSales;j;i b2 FA=TA;j;i B3 EBIT=TA;j;i b4 LogAge;j;i 1;j;i LTD=TA;i; j ai b1 LogSales;j;i b2 FA=TA;j;i B3 EBIT=TA;j;i b4 LogAge;j;i 1;j;i

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Drawing from the mathematical denitions adopted by previous studies on nancial-leverage determinants, the key variables for the above estimations are dened as follows: . TD/TA, i, j is total liabilities divided by total assets for rm j in time i. . LTD/TA, i, j is long-term debts divided by total assets for rm j in time i. . STD/TA, i, j is short-term debts divided by total assets for rm j in time i. . LogSales, i, j is a proxy for rm size and equals natural logarithm of sales for rm j in time i. . FA/TA, I, j is a proxy for asset tangibility and equals xed assets divided by total assets for rm j in time i. . EBIT/TA, j,i is a proxy for protability and equals earnings before interest and tax divided by total assets for rm j in time i. . LogAge, j,i is a proxy for rm-age and equals natural logarithm of number of years rm existed before incorporation for rm j in time i. . 1, j,i is the error term. Empirical results Table I summarizes the averages and standard deviations of the different measures of nancial leverage and related exogenous variables. As shown in the table, the average ratio of total liabilities to total assets among Nigerian-quoted rms stands at 70.66 percent. Of this rate, the ratio of current liabilities/short-term debts stands at 64.6 percent, while long-term debt ratio is 6.06 percent. This shows that Nigerian rms nance their operations mainly with short-term liabilities, and rely less on long-term debts. It also lays credence to a claim that rms nd it difcult to access long-term nances because of the high level of nancing frictions in the countrys nancial system. The low-standard

Variable Total debt ratio Short-term debt ratio Long-term debt ratio Firm size Asset tangibility Protability Firm age

Observation 1,124 1,124 1,124 1,144 1,123 1,126 1,204

Mean 0.707 0.646 0.061 3.018 0.367 0.091 1.505

SD 1.770 1.714 0.169 0.897 0.416 0.220 0.187

Minimum 0.000 0.000 0.000 2 0.523 0.000 2 2.400 0.778

Maximum 51.800 50.943 3.575 5.103 9.405 1.875 1.919

Table I. Summaries of basic descriptive statistics

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deviations associated with long-term debt ratio, protability and rm age provides some indications that Nigerian-quoted rms generally make less use of long-term nance, have low-protability ratio, and are of relatively the same age. The result on rm age further conrms the notion that the equity market in Nigeria has not being a very popular one, especially to non-nancial rms operating in the country. Table II reports the degree of correlation between each pair of variables both for the dependent and the independent variables. As expected, the results indicate that both the short-term debt measure and the long-term debt measure are strongly positively correlated with total debt measure at 98.5 percent and 51.2 percent, respectively. Apart from rm age and rm size that are correlated positively at 43.1 percent, there is very little case of inter-correlation between each pair of the exogenous variables. Thus, there seems to be no course to suspect serious cases of multicollinearity in the variables. Hausmans test is used to determine which of the two basic approaches for panel estimation model the xed-effects and random-effects models best ts our estimation model. The results arising from both models are presented in Table III. The results show that the test value is 39.37, and that the associated probability is 0 percent. Based on the above results, we reject the null hypothesis and, conclude in favor of the absence of random effects in the model, and that the difference in the coefcients of the two models is systematic. Thus, the xed-effects panel regression is sued as basis for assessing the impact of rm size on nancial-leverage practices in Nigerian-quoted rms. Finally, Table IV reports the results of the xed-effects panel regression. The results agree very consistently with the propositions of the pecking order hypothesis;
Total debt ratio Total debt ratio Short-term debt ratio Long-term debt ratio Firm size Asset tangibility Protability Firm age 1.000 0.985 0.512 0.036 0.008 2 0.267 2 0.039 Short-term debt ratio 1.000 0.354 0.029 2 0.039 2 0.284 2 0.021 Long-term debt ratio

Firm size

Asset tangibility

Protability

Firm age

Table II. Correlation results on the relationship among the estimation variables

1.000 0.047 0.232 2 0.032 2 0.105

1.000 0.013 0.087 0.431

1.000 2 0.064 2 0.035

1.000 2 0.037

1.000

Within-groups (xed-effects model) (1) Firm size Asset tangibility Protability Firm age 2 0.321 * (0.080) 2 0.055 (0.064) 2 0.925 * (0.145) 2.760 * (0.585)

Generalized least square (random-effects model) (2) 0.007 2 0.035 2 1.167 * 0.261 (0.051) (0.063) (0.138) (0.278)

Difference (1) 2 (2) 2 0.328 2 0.020 0.241 2.500

Table III. Estimated coefcients for both the xed- and the random-effects models

Notes: *Signicant at 5 percent level; x 2 value 39.370; Prob . x 2 0.000

Exogenous variables Constant Firm size Asset tangibility Protability Firm age R2 Within Between Overall F-test Prob . F No of observations

Endogenous variable: TDR 2 2.410 (2 4.12) * 2 0.321 (2 4.02) * 2 0.055 (0.064) 2 0.925 (2 6.39) * 2.760 (5.57) * 0.092 0.050 0.001 26.09 0.000 1,102

Endogenous variable: STDR 2 2.087 2 0.273 2 0.112 2 0.950 2.424 (2 3.89) * (2 3.72) * (2 1.90) * (2 7.14) * (5.33) *

Endogenous variable: LTDR 2 0.323 (2 2.90) * 2 0.048 (2 3.17) * 0.057 (4.65) * 0.025 (0.89) 0.336 (3.57) * 0.034 0.093 0.003 8.98 0.000 1,102

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0.102 0.026 0.007 29.26 0.000 1,102

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

Table IV. Fixed-effects regression estimation results

and state that size is negatively and signicantly related to nancial leverage. This indicates that the larger a rm is, the less its likelihood of using debt nancing. As shown in the table, the result is the same when short-term debt ratio and long-term debt ratio are substitutionally used as the endogenous variables. The results contradict the earlier ndings of researchers that resolve empirically, that the relationship between size and leverage is positively signicant (examples of such studies are: n et al., 2005; Rajan and Zingales, 1995; Ferri and Jones, 1979; and among others). Padro The ndings, however, is in consonance with the empirical ndings of Cooley and Quandrini (2001), Gupta (1969), Faulkender and Petersen (2006), Graham (2000), as well as Titman and Wessels (1988) who conclude alike that rm size and nancial leverage have negative relationship. The reason, according to these researchers, is that larger rms have more access to the equity market and may have more accumulated internal nances than smaller rms. 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 (2005) who both resolve that larger rms are nanced with less external debts in countries with undeveloped capital markets or weak creditor rights. The results on the other controlling variables complementarily conrm an over-bearing inuence of the pecking order theory in the nancing patterns of Nigerian-quoted rms. The results show, for instance, that the relationship between protability and nancial leverage is highly signicant and negative indicating that rms that are more protable are very much likely to rely on internal capital in nancing their operations. Firm-age is found to have positive and signicant relationship with nancial leverage implying that the older a rm is, the more likely it may have accumulated internal nances, and the less likely it would rely on borrowed funds. It is also found that asset tangibility has positive but non-signicant

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coefcient indicating the less inuence of collateral values in the total nancing behavior of rms in Nigeria. The latter is not surprising because the nancing structures of the rms are dominated by current liabilities, which invariably do not require such collateral deposits. This claim is further validated by the fact that, with long-term debt measure as the dependent variable, the coefcient of asset tangibility is found to be strongly positive and signicant thus providing some empirical validation to the tradeoff theory that is applicable only in the case of long-term nancing patterns of the rms. Conclusions This study provides some reasonable revelations on the effects of rm size on the corporate nancing behaviors of rms operating in a country with an undeveloped, inefcient and complex nancial system. Using panel data from quoted Nigerian companies, the study establishes that the basic characteristics of rms are more consistent with the xed effects, than with the random-effects estimation model. The study nds some pecking order patterns in the nancing choices of the rms, with large, more protable and older rms tending to rely less on debt nancing, and more on other sources. The study shows, however, that because of the constraints in the countrys nancial system, Nigerian rms have a common practice of pecking on short-term nancing than on the long-term nancing, irrespective of their corporate sizes. Of the 70.7 percent found as the average total debts to total assets ratio among the rms, for instance, as high as 91.4 percent is of short-term liabilities, while only 8.6 percent constitutes long-term liabilities. The practical implication is that because of their predominant use of short-term nances, even the larger Nigerian rms may remain constrained in making capital investments necessary for growth. They, therefore, need to take advantage of their sizes to build strong reputation and high-collateral values that help to guarantee access to long-term equity and debt nances. Admittedly, the geographical scope of this study may be considered small, at least from an international point of view. The geographical scope may therefore be expanded in future studies to cover those African countries that have similar economic characteristics, and where the nancial markets have been seriously weakened by persistent economic and political crises. Again, the study makes use of only quoted non-nancial rms hence sending a signal that the results reached may not be extended to apply in the cases of unquoted rms and small and medium scale enterprises. It makes a research sense, therefore to investigate the impact of size on the funding habits of these categories of rms. A study that compares empirically the nancial-leverage determinants of quoted and non-quoted companies would also help to throw more light on the dynamics of rm-size and nancing patterns in the Sub-Saharan African economies.
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Further reading Bari, F. (2003), Analyzing growth in South Asia: special reference to East Asia, NIPA Karachi Journal, Vol. 8 No. 1, pp. 47-62. Beckner-Blease, J.R., Baumann, H. and Kaen, F.R. (2005), An investigation of the small rm effect using accounting measures of protability: does it exist?, paper presented at the Financial Management Association Conference, January. Biais, B. and Casamatta, C. (1999), Optimal leverage and aggregate investment, The Journal of Finance, Vol. 54, pp. 1291-323. Buferna, F., Bangsassa, K. and Hodgkinson, L. (2005), Determinants of capital structure: evidence from Libya, Research Paper Series No. 2005/08, Management School, University of Liverpool, Liverpool. Claessens, S., Djankovs, S. and Larry, H.P.L. (2002), Disentagling the incentive and entrenchment effects of large shareholdings, The Journal of Finance, Vol. 57, pp. 2741-71. Gregory, N. and Tenev, S. (2001), The nancing of private enterprises in China, IMF Finance & Development, Vol. 38 No. 1, pp. 14-17. Jensen, M. (1986), Agency cost of free cash ow, corporate nance and takeovers, American Economic Review, Vol. 76, pp. 323-39. John, T.A. (1993), Accounting measures of corporate liquidity, leverage, and costs of nancial distress, Financial Management, Vol. 22, pp. 91-100. Kumar, J. (2004), Does ownership structure inuence rm value? Evidence from India, EconWPA Finance Series No. 0406008. Leland, H. (1998), Agency costs, risk management, and nancial structure, The Journal of Finance, Vol. 53 No. 4, pp. 1213-43. Qayyum, A. (2002), Demand for bank lending by the private business sector in Pakistan, The Pakistan Development Review, Vol. 41 No. 2, pp. 149-59.

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