Determinants of Leverage in Emerging Markets and the Moderating Effect of Foreign Ownership: Evidence from Nigeria

Abstract

Managers of corporations are usually faced with several strategic decisions to make, including those related to capital structure and financial leverage. This study examines the determinants of leverage practices of listed non-financial firms, both local and foreign, and the moderating effect of foreign ownership. The study uses data from 61 listed non-financial firms over the period 2011–2021 and employs the generalized method of moments estimation technique to explore direct and moderating relationships. The key findings show that profitability, firm growth, liquidity, asset tangibility, capital expenditure, dividend and foreign ownership decrease leverage significantly, while holding more cash increases leverage practices significantly. In particular, firm growth, asset tangibility and dividend increase leverage insignificantly (significantly for cash), whereas return on asset and liquidity significantly decrease leverage in local firms (insignificantly for capital expenditure). On the other hand, all firm characteristics, except cash and dividends, significantly decrease leverage in foreign firms. Moreover, foreign firms have more debt financing compared to the local firms in Nigeria. It is also evident that foreign ownership moderates the relationship between return on asset, firm growth and leverage practices. Such findings should assist managers, investors and regulators in Nigeria to understand the determining factors of leverage and to consider the accruing benefits of debt financing over equity financing.