Title:
TESTING THE TRADE-OFF THEORY OF CAPITAL STRUCTURE IN NIGERIAN FIRMS

Authors:
Abass Shiro and Kelvin Biiranee

Abstract:
The research evaluates the Trade-Off Theory of capital structure for Nigerian fast-moving consumer goods (FMCG) firms. The research examines FMCG firms listed between 2014 and 2023 through an ex post facto design that uses secondary data from audited annual financial reports of 20 companies. The Debt-to-Equity (D/E) ratio represents capital structure and the analysis includes profitability through ROA and ROE as well as asset tangibility and firm size and tax rate and growth opportunities and liquidity. Analysis includes correlation methods and panel regression models (Fixed Effects and Random Effects) whose selection relies on the Hausman test results. The Fixed Effects model has demonstrated superiority in identifying results that reinforce the Trade-Off Theory. Strong financial health leads firms to choose internal financing over external financing because profitability and liquidity have negative effects on capital structure. Leverage shows significant positive relationships with asset tangibility together with firm size and tax rate while profitability and liquidity maintain negative associations according to the theory. Nigeria's debt levels show a positive and significant relationship with growth opportunities despite standard market expectations because of potential structural constraints in the country's equity markets. The study finds that individual company characteristics determine capital structure choices effectively while validating the relevance of TradeOff Theory for emerging market conditions. The study suggests debt usage alignment strategies which combine firm fundamentals and market realities through policy recommendations and managerial approaches.

Keywords:
Capital Structure, Trade-Off Theory, FMCG Firms, Panel Regression, Nigeria

DOI:
https://doi.org/10.37500/IJESSR.2025.8317

Date of Publication: 01-06-2025