Financial Structure on Firm Value: Analysis of Non-Financial Sector Firms in Nigeria

The sustainability of a firm's financial and business comparative advantage endogenously anchors on the determination of the best-fit capital structure mix to achieve optimal use of the limited and available resources. This study assessed the financial structure's effect on a firm's market value in 40 listed non-financial firms in Nigeria. The dataset was collated from their audited annual financial statements reported from 2001-2024. The study adopted a triangulation method of analysis, which comprised a barrage of accounting, pre-post estimation techniques, and the panel technique. The random effect model was selected as the best-fit technique of analysis using Hausman’s test. The dynamic nature of a firm's financial structure is influenced by various operational and business activities within and outside of the firm. Results revealed that total and long-term debt positively influenced market value, due to tax shield benefits and investors' perception of long-term debt as a strategic investment, reflecting financial stability and confidence in the firm’s future cash flows. Short-term debt's negative influence on market value revealed that short-term debt was detrimental to the market perception and valuation of the firms. It aligned with the pecking order theory, where firms prioritise internal funds and avoid short-term debt due to asymmetric information and higher perceived risk by investors. The debt structure's influence on the firm’s market value varied based on usage and profit-generating efficiency of the firm. The pecking order, trade-off, and agency theories corroborated the study results. The study concluded that a firm's financial structure mix is relevant to its market value and thus supports the Modigliani and Miller (1963) relevant proposition of tax shield advantage on debt, enhancing the firm's after-tax cash flows, improving market value, and financial position.