Business Risk, Industry Affiliation, and Corporate Capital Structure: Evidence From Publicly Listed Nigerian Companies

Abstract

This study demonstrates the extent to which changes in business risk help predict the capital structure choices of Nigerian listed companies. The findings support a U-shaped function with leverage ratio decreasing with earnings volatility, but only up to a cut-off point of 32% per annum. The results are consistent with agency cost models, which predict an escalation in the conflicts between shareholders and firm managers beyond a certain level of volatility with a subsequent increase in the equity risk premium. The expected rise in the cost of equity capital gives debt priority and helps avoid potential underinvestment.