Dynamic modelling of the relationship between financial leverage and firm value of selected firms quoted on the Nigerian Stock Exchange
Keywords:Financial Leverage, Firm Value, Tobin’s Q, GMM
This study examined the long-run effect of financial leverage on firm value with evidence from a sample of 62 firms quoted on the Nigerian Stock Exchange, over the five-year period between 2014-2018. The level of financial leverage as measured by the Debt-Equity ratio while firm value was represented by Tobin’s Q Market-Book Value Ratio. The study contributes to the literature by appraising the dynamic dimensions of the causal relationship between firm value and financial leverage, an investigation that has remained elusive in indigenous studies. The study determined the degree of long-term causality by employing an auto-regressive model estimated by the Generalized Method of Moments (GMM) technique. The regression results show that financial leverage has a significant positive effect on the firm value both in the short and long run, while the result of the correlation analysis carried out reveals that there is a significantly positive and strong linear relationship between the time series of firm value and its lagged version implying that firm value does not demonstrate traits of Mean reversion. The Management of these companies was advised to optimize firm value by undertaking quality projects and relying more on debts for funding.
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