Research Article

CONGLOMERATION AND LEVERAGE: TEST OF AGENCY THEORY’S SPECIAL USE OF DEBTS HYPOTHESIS IN IGERIAN CONGLOMERATES FIRMS

Mohammed Lawal1*, Mahmood, Baffa Asma’u2
1 Department of Accounting, Ahmadu Bello University, Zaria Kaduna State, Nigeria
2 Department of Accounting, Bayero University, Kano
* Corresponding author: lawal.mohammed.sani@gmail.com
Published: Dec, 2014
Pages: 89-114
Views: 49
Downloads: 43

Abstract

The study is a contribution the large discussion on the determinants of capital structure in firms but with specific focus on conglomerates short term leverage decision. The impetus of the study in based on the need to provide empirical evidence to support the Special Use of Debts Hypotheses (SUDH) proposed by Jensen and Meckling’s (1976) agency theory. To test the SUDH, speed of divesture in conglomerates was introduced as a mediating factor to diversification’s potency in determining leverage in conglomerates. Short term debt, number of subsidiaries and the Hicks (1950) Acceleration coefficient were used to proxy leverage, diversification and speed of divesture in conglomerates respectively. Using 8 year’s data collected from the annual reports of six Nigerian conglomerates covering the period from 2007 to 2014, the study used the Heteroskedasticity Autocorrelation Corrected (HACC) regression technique which produced robust standard errors to analyze the sample data. The study found significant relationship between diversification and leverage while it identified a significant partial relationship between diversification and speed of divesture policy. This allows us to test for mediating effect of speed of divesture on the relationship between leverage and diversification which was found to be significant. Therefore the study provides evidence to support the claim that as conglomerates increase the number of their subsidiaries (diversification), the corresponding change in their leverage is related to the indirect relationship between the rates at which they invest in fixed assets in response to increase in sales from new subsidiaries. Despite the contribution of this study the wider body of literature on capital structure, we reckon that there is a need for further research with the view for properly accounting for speed of divesture policy of conglomerates

Keywords

Diversification Leverage Conglomerates Acceleration Coefficient

References

  1. Anderson, R. C., & Reeb, D. M. (2003). Founding-Family Ownership, Corporate Diversification, and Firm Leverage*. Journal of Law and Economics, 46(2), 653-684.
  2. Aremu, M. A., Ekpo, I. C., Mustapha, A. M., & Adedoyin, S. I. (2013). Determinants of Capital Structure in Nigerian Banking Sector. International Journal of Academic Research in Economics and Management Sciences, 2(4), 27.
  3. Bany-Ariffin, A. N., Nor, F. M., & McGowan, C. B. (2010). Pyramidal structure, firm capital structure exploitation and ultimate owners' dominance. International Review of Financial Analysis, 19(3), 151-164.
  4. Berger, P. G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of financial economics, 37(1), 39-65.
  5. Cheung, Y. L., Qi, Y., Rau, P. R., & Stouraitis, A. (2009). Buy high, sell low: How listed firms price asset transfers in related party transactions. Journal of Banking & Finance, 33(5), 914-924.
  6. Clark, J. M. (1917). Business acceleration and the law of demand: A technical factor in economic cycles. The Journal of Political Economy, 217-235.
  7. Comment, R., & Jarrell, G. A. (1995). Corporate focus and stock returns. Journal of financial Economics, 37(1), 67-87.
  8. Denis, D. J., Denis, D. K., & Sarin, A. (1997). Agency problems, equity ownership, and corporate diversification. Journal of finance, 135-160.
  9. Dimitrov, V., & Tice, S. (2006). Corporate diversification and credit constraints: Real effects across the business cycle. Review of Financial Studies, 19(4), 1465-1498.
  10. Dittmar, A., & Shivdasani, A. (2003). Divestitures and divisional investment policies. The Journal of Finance, 58(6), 2711-2744.
  11. Gill, A., & Mathur, N. (2011). Factors that influence financial leverage of Canadian firms. Journal of Applied Finance and Banking, 1(2), 19-37.
  12. Graham, J. R., Lemmon, M. L., & Wolf, J. G. (2002). Does corporate diversification destroy value?. The Journal of Finance, 57(2), 695-720.
  13. Gujarati, D. N. (2005). basic econometrics p. 540. reference Publish: 33. IsbN 975-7860-99-9, Istanbul.
  14. Hair, J. F. J., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2010). Multivariate data analysis a global perspective. Pearson Education Inc. USR, New Jersey, 7458.
  15. Haynes, M., Thompson, S., & Wright, M. (2000). The determinants of financial divestment in the UK. International Journal of Industrial Organization, 18(8), 1201-1222.
  16. Hicks, J. R. (1950). A Contribution to the Theory of the Trade Cycle.
  17. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.
  18. Jhingan, M. L. (1997). Advanced Economic Theory (Micro- and Macroeconomics). Delhi: Vrinda Publications (P) Ltd
  19. Junior, J. N., & Funchal, B. (2013). The Effect of Corporative Diversification on the Capital Structure of Brazilian Firms1. Revista Contabilidade & Finanças, 24(62), 154.
  20. Kang, M., Lee, H. Y., Lee, M. G., & Park, J. C. (2014). The association between related-party transactions and control–ownership wedge: Evidence from Korea. Pacific-Basin Finance Journal, 29, 272-296.
  21. Kooij, M. (2013). Conglomerates and Leverage. Amsterdam Business School. University of Amsterdam (Unpublished masters thesis).
  22. La Rocca, M., La Rocca, T., Gerace, D., & Smark, C. (2009). Effect of diversification on capital structure. Accounting & Finance, 49(4), 799-826.
  23. Lang, L., Poulsen, A., & Stulz, R. (1995). Asset sales, firm performance, and the agency costs of managerial discretion. Journal of Financial Economics, 37(1), 3-37.
  24. Lewellen, W. G. (1971). A pure financial rationale for the conglomerate merger. Journal of Finance, 521-537.
  25. Lewellen, W. G., & Badrinath, S. G. (1997). On the measurement of Tobin's q. Journal of financial economics, 44(1), 77-122.
  26. Maksimovic, V., & Phillips, G. M. (2013). Conglomerate Firms, Internal Capital Markets and the Theory of the Firm. Robert H. Smith School Research Paper.
  27. Mello, A. S., & Parsons, J. E. (1992). Measuring the agency cost of debt. The Journal of Finance, 47(5), 1887-1904.
  28. Miao, J. (2005). Optimal capital structure and industry dynamics. The Journal of finance, 60(6), 2621-2659.
  29. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 261-297.
  30. Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American economic review, 433-443.
  31. Muller, D., Judd, C. M., & Yzerbyt, V. Y. (2005). When moderation is mediated and mediation is moderated. Journal of personality and social psychology, 89(6), 852.
  32. Myers, S. C. (1984). The capital structure puzzle. The journal of finance, 39(3), 574-592.
  33. Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187-221.
  34. Pandey, I. M. (1999). Financial Management–Vikas Publishing House Pvt. Ltd–.
  35. Parramore, K., & Watsham, T. (1997). Quantitative Methods in Finance. London: Thomson.
  36. Ross, S. A. (1977). The determination of financial structure: the incentive-signalling approach. The bell journal of economics, 23-40.
  37. Saunders, M., Lewis, P., & Thornhill, A. (2012). Research Methods for Business Students. sl: Pearson Education.
  38. Singh, M., Davidson, W. N., & Suchard, J. A. (2003). Corporate diversification strategies and capital structure. The Quarterly Review of Economics and Finance, 43(1), 147-167.
How to Cite

Lawal, M., & Asma’u, M. B. (2014). CONGLOMERATION AND LEVERAGE: TEST OF AGENCY THEORY’S SPECIAL USE OF DEBTS HYPOTHESIS IN IGERIAN CONGLOMERATES FIRMS. Nigerian Journal of Accounting Research, 10(2), 89-114.

M. Lawal, and M. B. Asma’u, "CONGLOMERATION AND LEVERAGE: TEST OF AGENCY THEORY’S SPECIAL USE OF DEBTS HYPOTHESIS IN IGERIAN CONGLOMERATES FIRMS," Nigerian Journal of Accounting Research, vol. 10, no. 2, pp. 89-114, December 2014.

Share this article:
Facebook X / Twitter LinkedIn
Download PDF View Full Text (PDF) Back to Articles