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

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