Impact of Debt Financing on Corporate Performance in Nigerian Economy

Introduction

Investments are needed to establish the kind of business that will help the economy to regulate it financial stability. Investments may come in different sources but the most popular source came from the debtors who are willing to support the firm’s production or selling activities.

Debt Financing

The effect of cash on product market performance will actually reflect of debt ratios. Corporate financing is a product of market decisions that was blended with the pure investment and debt financing. The impact of corporate debt financing will be seen competitive outcomes. In studies, the firms with low debt ratios is actually their debt capacity, firms will experience stronger product market performance than their highly indebted rivals (Fresard, 2009).

The negative side of the debts tackles the possibility of controlling for lagged leverage. The competitive effect of cash is not completely absorbed by that of debt ratios. The influence of cash on market share growth arises because there are cash that serves as a negative debt.

Specifically, cash is not the same as negative debt when reducing debt and does not guarantee the ability to access similar debt conditions in the future when debt capacity diminishes. When a firm has a saturated debt capacity when it faces financial constraints and when its investment opportunities tend to arrive when cash flows are low when hedging needs are high (Fresard, 2009). The financial constraint of the firm is based on their asset size and assign to the quartile of the size distribution. It is said that the strong market effectiveness of the firm is usually depends on how strong the positive debt against the negative debt, that can support the continuous financial cycle.

Costs and Benefits

Issuing debt in a capital structure has a wide-ranging in terms of costs and benefits. In an overview, the capital structure depends on the specific circumstances of the firm and overall development of the capital market infrastructure. In different industry, the high leverage can reflect poor corporate governance that exerted too much control over firms. The more focus on size and market share while downplaying return on investment (Haksar and Kongsamut, 2003). The more likely to use debt financing as opposed to raising equity and diminishes the control on the ownership. And with this scheme of high leverage is the main symptom in making the sense of governance weaker.

When there is a presence of the large shareholder that will dominate the ownership of companies, the pursuance in financing policy has characterized the equity and dominating the companies in their respective industries. The usual strategy in company’s expansion projects is also expanding their investments in using borrowed funds although the returns on those investments are declining (Saldaña, 1999). It is because larger companies that have superior access in debt financing is used to apply this kind of strategy, that results in further concentration in industry sales.

Many corporate groups that have an affiliation with banks enjoy more advantages in terms of access in financing and investing in economy and operating in related industries. The advantage that enables the company in this type of option is acquiring the adequate debt financing for their projects because affiliation or relation with banks only means that the organization has a strong managerial impact and competitive within the industry.

Nigerian Manufacturing Sector

In Nigerian economy, policies were pursued for more of the periods were anti-growth in fiscal imbalances that were translated into high public debt and the monetary policy fueled the inflationary rates. The financial market adversely influences interest rates and adopts risks over the private sector credit in the face of the government’s large borrowing requirements (Adenikinju, 2005).

The weakness of the capital or financial market is indeed to need more funds that are fully required on both working capital and to finance investment. Nigerian economy, as well as the manufacturing sector has two source of financing capital which is the internal and external financing. In internal financing is exercised through retained earnings such as profits while external is a mixture of different sources namely debt, owner’s equity, grant and subsidies from the government. These two financing source of any firm creates a great impact in productivity.

Internal financing is generally believed to have a greater positive impact or repetition because retained earnings can usually be used more quickly and readily to improve productivity. However, external finance serves as an agent of restraint and can usually force management to pursue productivity-enhancing goals.

References:

Adenikinju, A., 2005. Productivity Performance in Developing Countries: Country Case Studies Nigeria. [Online] Available at: http://www.unido.org/fileadmin/import/60396_03_nigeria_final.pdf. [Accessed 27 Nov 2009].

Fresard, L., 2009. Financial Strength and Product Market behavior: The Real Effects of Corporate Cash Holdings. Journal of Finance [Online] Available at: http://www.afajof.org/afa/forthcoming/6386p.pdf. [Accessed 27 Nov 2009].

Haksar, V., & Kongsamut, P., 2003. Dynamics of Corporate Performance in Thailand. International Monetary Fund [Online] Available at: http://www.imf.org/external/pubs/ft/wp/2003/wp03214.pdf. [Accessed 27 Nov 2009].

Saldaña, C., 1999. Conference on Corporate Governance in Asia: A Comparative Perspective. Philippine Corporate Governance Environment and Policy and their Impact on Corporate Performance. [Online] Available at: http://www.oecd.org/dataoecd/7/55/1931508.pdf. [Accessed 27 Nov 2009].