Impact of Inflation on Firm Capital Structure Decisions in Nigeria: A Panel Data Approach

Abstract

The study provides empirical evidence on the relationship between inflation and firm capital structure dynamics in Nigeria using firm-level panel data comprising 21 quoted companies over a period of 10 years from 2007 to 2016. Three variants of inflation; core inflation, food inflation and headline inflation, are considered while capital structure is proxied by debt-equity ratio. When the three conventional panel data models; pooled least square, fixed effects and random effects models are estimated and compared, the results show that the random effects model is the most plausible description of the relationship between inflation and firm capital structure. The random effects results show that firm's financial leverage has a negative relationship with both core and food inflation rates but has a positive relationship with headline inflation rate. However, while none of the estimated coefficients is significant statistically, we argue that given the relatively large size of these coefficients, they are significant economically. Therefore, we conclude that Nigerian firms increase the level of their financial leverage in response to an increase in headline inflation rate but reduce it in response to an increase in both core and food inflation rates.