Moderating Effects of Cost of Capital on Debt Financing and Firm Value in Nigeria

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue VI, June 2020 | ISSN 2321–2705

Moderating Effects of Cost of Capital on Debt Financing and Firm Value in Nigeria

Auwalu Sani Ibrahim¹ and Isma’il Tijjani Idris^2
1Department of Management Science, Kano State College of Education and Preliminary Studies
²Department of Banking and Finance, ABU Business School, Ahmadu Bello University, Zaria

Abstract: The study examines the moderating effect of cost of capital on debt financing and firm value. Where as, micro panel analysis techniques were utilized for the companies under study spanning 2006-2016. Secondary data were obtained through the companies’ individual annual reports and data base of Nigerian Stock Exchange. The studies utilize a sample of 12 listed industrial goods companies in Nigeria. While, hierarchical moderated multiple regression analysis was used for the estimate. The findings of the study revealed a significant positive association among debt financing and value of listed industrial goods companies in Nigeria. While, cost of capital as a good moderator, it was emphasized that, debt financing and cost of capital are drivers of increasing value of the firm among listed industrial goods companies. It was recommended among others that, the finance managers should source capital from various avenues in such way it reduce risk and cost. Likewise, the listed Industrial goods firms should employ more use of debt financing.

Keywords: Cost of capital, debt financing, value of firms, Nigeria

I. INTRODUCTION

Value of firm has always been one of the utmost noteworthy matters of concern in corporate finance literature. It promotes the firm’s ability to accomplish the stakeholders wish. And yet, some researchers claim that, it is difficult to value a firm and this may be one of the many unresolved problems in finance (Ajanthan, 2013). However, the choice of mix of investment funds that constitute the capital structure of an organization can endanger the survival of the enterprises if is not properly envisaged. Nonetheless, managing cost of capital has been one of the most important issues in financing decisions and the greatest significant judgments by financial managers because it deals with sources of fund for their operation and growth. Decision on capital structure is essential as it relates to the cost of capital and firm value (Kurfi, 2003).The greatest concern of a firm is stakeholder’s value, hence firms must choose an optimal capital structure that will drives a maximum value (Morris, 2001). However, firms create value when they provide a benefit higher than its cost of investment in which the best combination of capital structure will lessen the firm’s cost of capital in general (Khadka, 2006). Further, the discussion on the significance of capital mix on the firm value will not be complete if we do not reveal the extent of this relationship by examining the moderating effect of the firm’s cost of investment. Thus, the research investigates the contingent influence of the cost of capital on debt financing and firm value relationship.

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