ABSTRACT
This study analysed the capital structure and performance differentials in selected livestock investments in Abia State, Nigeria. The selected livestock enterprises for this study were the poultry and piggery enterprises. A multi-stage random sampling technique was used in choosing the sample. Primary data collected from 83 livestock enterprises comprising of 50 poultry enterprises and 33 piggery enterprises were used for the study. Data collected were analyzed using some statistical and econometric tools like frequencies, percentages, averages, independent samples z-test, Maximum Likelihood Stochastic (MLS) regression, multinomial logistic regression technique and multiple regression technique. The findings showed that the mean age of the poultry and piggery enterprises operating in Abia state was 11.53 years and 9.67 years respectively. The findings also showed that 45.3% and 65.8% of the poultry and piggery enterprises respectively are located in the semi-urban areas of the state. The mean number of birds and pigs existed in the poultry and piggery enterprises in the study area were 1153 birds and 52 pigs per farm. Poultry and piggery enterprises operating in Abia state had a mean total current asset of N3,730,696.89 and N4,180,140.09 respectively while their mean total liabilities were N1,213,357.27 and N1,522,751.85 respectively. The composition of the capital structure showed that 70.0% and 66.2% of the poultry and piggery enterprises in Abia state are operated through a combination of equity and debt capital. The Mean income per poultry enterprise per annum was N1,512,477.00 and the Mean income per piggery enterprise per annum was N920,455.00. Rate of return to investment per poultry enterprise per annum was 94.81% while for piggery enterprise it was 37.19%. Comparatively, in terms of profitability analysis, poultry enterprise generates higher profit margins in Abia state than piggery enterprise. Poultry and piggery enterprise in Abia state are liquid, solvent and not highly leveraged. Expected total expenditure requirement of the business, profitability of the enterprise, size of the enterprise, growth of enterprise, business environment, liquidity, the total assets’ turnover, owner’s collateral and age of the enterprise significantly determined the capital structure of the poultry enterprise in Abia state whereas, expected total expenditure requirement of the business, profitability of the enterprise, size of the enterprise, growth of enterprise, liquidity, the total assets’ turnover and age of the enterprise significantly determined the capital structure of the piggery enterprise in Abia state. Size of the enterprise, outstanding debts of the enterprise, business stage, location of the enterprise, scale of operation, amount of savings, access to loan, significantly determined the level of investment in the poultry enterprise in Abia state while size of the enterprise, outstanding debts of the enterprise, business stage, location of the enterprise, scale of operation, amount of savings, access to loan significantly determined the level of investment in the piggery enterprise in Abia state. Credit receivables, amount of savings, cash at hand, trade credits, short-term debt capital and credit payable significantly influenced the performance of poultry enterprise in Abia State, whereas, credit receivables, amount of savings, cash in hand, short-term debt capital, trade credits, and credit payable significantly influenced the performance of piggery enterprise in Abia State. The study recommends that both government and other investors in agriculture should invest in large scale poultry and piggery enterprises in the state which are profitable so as to provide employment opportunity to the masses, make chicken and pork supplies more available as well as generate more funds to run the affairs of the state.
TABLE
OF CONTENTS
Title page i
Certification ii
Declaration iii
Dedication iv
Acknowledgments v
CHAPTER
1
1.0 Introduction 1
1.1
Background to the Study 1
1.2 Statement
of the Problem 4
1.3 Research Questions 7
1.4
Objectives of the Study 8
1.5 Hypothesis 8
1.6 Justification of the 10
CHAPTER 2
REVIEW
OF RELATED LITERATURE 12
2.1 Conceptual Framework 12
2.1.1 Concept of Capital Structure 12
2.1.2 Concept of Performance 16
2.1.3
Concept of Investment 18
2.1.4 The
Relationship between Capital Structure and Performance 20
2.1.5 Determinants of Capital
Structure 22
2.1.6 Determinants
of Investment Decision of an Entrepreneur 23
2.1.7 The Piggery
Enterprise 26
2.1.8The Poultry
Enterprise 29
2.1.9 Constraints
to Pig and Poultry Production 33
2.2 THEORETICAL FRAMEWORK 35
2.2.1 Irrelevant and Relevant Theory 35
2.2.2 Agency Cost
Theory 36
2.2.3 Pecking Order Theory 37
2.3REVIEW OF EMPIRICAL STUDIES 38
2.4ANALYTICAL FRAMEWORK 44
2.4.1 Comparison of the Mean Variation
between Two Population Samples 44
2.4.2 Regression Analysis. 45
2.4.3 Multinomial Logistic Model for Analysing Choice
of Capital Structure 47
CHAPTER 3
METHODOLOGY 49
3.1 Research Design 49
3.2 Area of the Study 50
3.3 Population of the Study 51
3.4 Sample and Sampling Techniques 52
3.5 Methods of Data Collection 54
3.6 Methods of Data Analysis 54
3.7 Model Specification 55
3.7.1 Compare the Level
of Capital Structure of Poultry and Piggery
enterprises in Abia State
56
3.7.2 Determinants of Capital Structure
Model 56
3.7.2.1 Determinants of
Capital Structure of Poultry Enterprises 57
3.7.2.2 Determinants of
Capital Structure of Piggery Enterprises 58
3.7.3 Determinants of the Level of
Investment of the Enterprises 59
3.7.3.1 Determinants of
Investment level into Piggery Enterprises 59
3.7.3.2 Determinants of
Investment level in Poultry Enterprises
60
3.7.4 Multinomial Logistic Regression Model for Estimating the Factors that Influence
The Preference of Capital Structure
(Equity or Debt) for Investment by Poultry
and Piggery Enterprises in Abia state. 61
3.7.5 Multiple Regression Model for Estimating the Effect of
Capital Structure on the
Performance of Poultry
and Piggery Enterprises in Abia State 63
CHAPTER 4
RESULTS AND
DISCUSSION
4.1 Features of the Selected Livestock Enterprises
in the Study
Area 65
4.2 Level of Capital Structure, Investment
and Performance of
Selected Livestock Enterprises
in the Study Area 68
4.2.1 Level of capital structure of
the selected livestock enterprises in the study area 68
4.2.2 Level of Investment in the
selected livestock enterprises in the study area 70
4.2.3 Level of performance of
poultry and piggery enterprises in Abia State 73
4.3 Comparison of the Level of Capital
Structure, Investment Level and Performance of Selected Livestock
enterprises in the Study Area 83
4.4 Determinants of Capital Structure and
the Level of Investment in the Selected Livestock enterprises in the Study Area 85
4.4.1 Determinants
of capital structure in the selected livestock enterprises in the study 85
4.4.2 Determinants of the level of
investment in the selected livestock enterprises in the study
area 91
4.5
Factors That Influenced the Performances of Capital Structures for Influence in
Poultry and Piggery Enterprises in Abia State 97
4.6
Effect of Capital
Structure on Performance of Poultry and
Piggery Enterprises in
the Study Area 116
CHAPTER
5
SUMMARY, CONCLUSION AND RECOMMENDATIONS 124
5.1 Summary 124
5.2 Conclusion 133
5.3 Recommendation 136
REFERENCES 138
APPENDIX
LIST OF TABLES
4.1 Features of poultry
and livestock enterprises in Abia state 65
4.2 Percentage composition of the level of capital
structure of poultry and piggery enterprises
in Abia State 68
4.3 Source of equity and
debt financing of the selected livestock in Abia State 69
4.4 Mean level of investment in poultry and
piggery enterprises in Abia state 71
4.5
Annual net farm return (profitability) analysis of poultry and piggery
enterprises In
Abia state. 73
4.6
Composite Balance Sheet of poultry enterprise in Abia state, ending December 31, 2017. 77
4.7 Computation of liquidity ratio, solvency
ratio and leverage ratio for poultry enterprise in Abia state 78
4.8 Composite Balance Sheet of piggery
enterprise in Abia state, ending December
31, 2017 80
4.9
Computation of liquidity ratio, solvency ratio and leverage ratio for a piggery enterprise
in Abia state. 81
4.10
Test of significant difference in the mean capital structure, investment level and performance of poultry and piggery
enterprises in Abia state. 83
4.11Maximum Likelihood Stochastic (MLS) regression estimate of the
determinants of capital structure of
poultry and piggery enterprises in the study area 85
4.12Maximum Likelihood
Stochastic (MLS) regression estimate of the determinants of the level of investment
into poultry and piggery enterprises in the study area 91
4.13
Estimated output of multinomial logit model of the factors that influence the
enterprise in Abia state the
preference of capital structure (equity or debt) for investment in poultry 98
4.14Marginal
effects and quasi-elasticity estimates 105
4.15
Estimated output of multinomial logit model of the factors that influences
the preference of capital
structure (equity or debt) for investment by piggery enterprise in Abia state. 107
4.16 Marginal effects and quasi-elasticity
estimates for piggery enterprise
4.17 Multiple regression
estimates of the effect of capital structure on the performance 116
4.18Multiple regression
estimates of the effect of capital structure on the performance 120
Chapter 1
1.0 INTRODUCTION
1.1 BACKGROUND TO
THE STUDY
Livestock production has remained a
vital sub-sector in Nigeria today and enhancing the performance through
appropriate capital structure is one major need in the country. Livestock
production in Nigeria is achieved mostly through ‘nomadic or rural households’
production of sheep, cattle, goat, pigs, poultry (ducks, guinea fowl and
chicken) and rabbit etc. at subsistence level. Gross Domestic Products (GDP)
from agriculture averaged N3,771,185.70
Million from 2010 until 2017, and reach an all-time high value ofN5,189,365.99 Million in the third quarter
of 2017 with livestock production accounting for only 38.7% of GDP from
agriculture (Nwankwo, Nnamerenwa, and Elechi, 2018). No meaningful growth can occur in the economy
without the profitability of agro-based firms which livestock production is
included (Kira 2013). As a result of livestock enormous contribution to the
growth and development of several economies, livestock’s are aptly referred to
as "the engine of growth and catalyst of socioeconomic transformation of
any country" (Onwumere, 2008). Livestock production is an asset as well as
source of income for many Nigerians, creating employment opportunities, source
of revenue to the government (tax and export), source of food and meat that
partly satisfy the animal protein requirement, provides animal manure for crop
production and provides power and transport options.
(Rahman and Yakubu, 2006).The
importance of livestock production is considered in the role they play in the
general society. Livestock production provides food, income and other useful
product to the people. They contribute substantially to the livelihood of many
rural households (Duru, 2006). However, livestock consumption is gaining wide
prominence particularly in developing countries where 50% or more of their
protein comes from livestock production like in Nigeria. This is because
livestock products are more affordable, palatable and readily available than
other sources of animal product (Mburuet
al., 2007). The demand for livestock
products in Nigeria is on the increase considering the rise in population which
stood at over 190 million people in 2017, The extent of livestock production is
dependent on the capital structure of the enterprise and this makes analysis of
the capital structure of livestock enterprises an important venture or an
imperative zone in Contemporary research. (Onwumere, 2008).
Financing is one of the
crucial areas in any business. A financing manager is concerned with the
determination of the best financing mix and combination of debts and equity for
his enterprise. The mix of debt and equity that a business enterprise uses to
finance its business is referred to as capital structure decision. (Damodaran, 2001). Capital structure of a livestock enterprise
plays a crucial role in the determination of its performance as well as shows
the extent of debt or equity financing of the enterprise. The level of
financing any livestock enterprise is subject on its capital structure.
Capital structure according
to Kennon (2010) refers to the percentage of capital (money) at work in a
business by type. Capital structure refers to the kinds of securities and the
proportionate amounts that make up capitalization. It is the mix of different
sources of long-term sources such as equity shares, preference shares,
debentures, long-term loans and retained earnings. The term capital structure
refers to the relationship between the various long-term sources financing such
as equity capital, preference share capital and debt capital. According to
Paramasivan and Subramanian (2009), deciding the suitable capital structure to
employ is an important decision a livestock enterprise owner makes since it
influences the value (performance) of the enterprise.
Capital structure is one of the most
important effective parameters on the valuation and direction of economic
enterprises in the capital markets. Livestock enterprise owners are keen to
profit maximization and how best to earn more returns by determining the best
combination of financial resources for their enterprises. Debt financing is a
situation whereby credit or loans are borrowed either from formal or informal
financial institution for investment purpose whereas, equity financing is a
situation in which personal saving and earnings accruing from an investment is
solely utilized in financing a business.
One of the importance of capital
structure is that it is tightly related to the ability of enterprise to fulfill
the needs of various stakeholders. Capital structure represents the major
claims to a corporation’s assets which includes the different types of both
equities and liabilities (Hamada, 2009). There are various alternatives of
debt-equity ratio, these includes; 100% equity: 0% debt, 0% equity: 100% debt
and X% equity: Y% debt (Dare and Sola 2010). From these three alternatives,
option one is that of the unlevered enterprise, that is, the enterprise that
shuns the advantage of leverage (if any). Option two is that of an enterprise
that has no equity capital. This option may not actually be realistic or
possible in the real life economic situation, because no provider of funds will
invest his money in an enterprise without equity capital. This partially
explains the term “trading on equity”, that is, it is the equity element that
is present in the enterprise’s capital structure that encourages the debt
providers to give their scarce resources to the business. Option three is the
most realistic one in that, it combines both a certain percentage of debt and
equity in the capital structure and thus, the advantages of leverage (if any)
is exploited. This mix of debt and equity has long been the subject of debate
concerning its determination, evaluation and accounting especially as is
connected to small and medium scale livestock production.
Financing
decisions are some of the most critical decisions for livestock enterprise
owners because they have direct impact on capital structure and performance of
the livestock enterprise (Brigham, 2004). Usually livestock enterprises owners
prefer internal funds over debt, growth-oriented firms use more debt to fund
their growth and higher educated firm owners use less debt (Lucey and
Voronkova, 2008). Researches on livestock sector have attracted attention from
researchers, policy makers, and practitioners due to their contributions to
economic growth (Kira, 2013). There has been a wide acclamation that most rural
livestock enterprise operators rely more on their personal saving to finance
their business. Such acclamation is expedient to be certified in Abia state
where according to Duru (2006) majority of the livestock production activities
are carried out in the rural and peri-urban areas. Capital structure of a
livestock enterprise should be high enough as such to enhance the profitability
(performance) of the enterprise. A livestock entrepreneur will have to make
decisions on the appropriate capital structure that suits his/her business
plan. The capital structure that suits a particular livestock enterprise may
not be suitable for another. Differences are bound to exist in the real effect
of capital structure on the investment and performance of different livestock
enterprises. An enterprise that utilizes both debt and equity financing mix may
probably be better off than an enterprise financed with either debt or equity.
This is hypothetical and the true nature of this, in Abia state this can be
ascertained by considering the capital structure and performance differentials
in poultry and piggery investment which have both assume major quick investment
opportunities in the livestock sub-sector today. This is the thrust of this study which focus
on capital structure and performance differentials in the investment and
production of poultry and piggery in Abia state, Nigeria.
1.2 STATEMENT OF
THE PROBLEM
In
Abia state, poultry and piggery production are seen as basic livestock
enterprises that contribute undeniably to her economic growth and development.
Poultry and piggery enterprises employs labour, serve as a major source of food
(animal protein) for the ever-growing population and generates huge amount of
revenue for their owners.
Despite
the indispensable relevance of poultry and piggery enterprises in Abia state’s
economy, these enterprises have suffered poor funding. There are indications
that livestock farmers are limited by a lot factors which limits their scale of
operation an invariably affecting the level of output accruing from their
livestock business. Poultry and piggery enterprises are a vital part of the
economies and a large percentage of these enterprises failures are attributed
to inadequate or inappropriate capital structure. According to Rahji and
Fakayode (2009) the continuous shortage of capital to finance poultry and
piggery capital structure remains a major factor constraining poultry and
piggery investment and production in Abia state despite her comparative
advantage in the form of favourable climatic and ecological conditions. Poor
financing hampers poultry and piggery production in Abia state. Due to
inadequate finance availability, and poor accessibility to the available one,
farmer’s ability to utilize debt financing as a support to equity financing
becomes constrained.
Several
authors (Nasiru, Jibril, Sani, and Sabo, 2005; Ekpedu, 2006; Mohammed, 2007 and
Rahji and Fakayode, 2009) have nevertheless opined that agricultural production
and development are influenced by financing decisions and other macroeconomic
environments and shifts in these factors heightens agricultural production
instability. Review of the relevant literatures (Abdul,
2010; Akinyomi, 2013; Appah, Okoroafor, and Bariweni, 2013; and Babalola, 2014)regarding
the capital structure issues, shows that the focus of most capital structure
studies is on the listed firms, and the small businesses like the poultry and
piggery enterprises capital structure are highly overlooked. Various empirical
researches on capital structure gathered data from the firms, which are
classified as large businesses (Chittenden et
al., 1996; Roshanak, 2013).
Researches on the poultry and piggery
enterprises capital structure clearly show that there is a massive difference
between poultry and piggery enterprises financing behaviour and their large
counterparts. According to Roshanak (2013), small businesses are not engaged
in the problems, as well as opportunities, of large firms. Therefore, there is
the need to investigate the financing of most livestock enterprises with the
aim of stimulating increased investment and output through efficient capital
structure. This is imperative considering that advancement in livestock
production in Abia state requires an efficient equity and debt financing
system, and with adequate and timely financing, livestock production can
advance beyond its primary function of supplying animal protein and fiber.
Studies
by Akinyomi (2013), Appah, Okoroafor, and Bariweni
(2013), and Babalola (2014) Centred on whether there is an optimal
capital structure for an individual firm or whether the proportion of debt
usage is relevant to the individual firm's performance. Although, there have been substantial
research efforts in determining what seems to be an optimal capital structure
for firms, yet no universally accepted theory throughout the literature
explaining the debt-equity choice of firms. These studies do not provided
information on the relationship between capital structures and profitability of
poultry and piggery enterprises in developing countries. Most of these studies
did not also provide any information on the composition of capital structure
and investment behaviour of livestock enterprises; compared the level of
capital structure as well as the investment level of poultry and piggery
enterprises, determined and compared the profitability of poultry and piggery
enterprises; determined the effect of capital structure on the investment and
profitability of poultry and piggery enterprises; estimated the factors that
influences the choice of capital structure for investment by poultry and
piggery operators; nor identified the factors militating against the choice of
capital structure, investment behaviour and profitability of poultry and
piggery enterprises. These unresolved issues spurred the need to assess the
relationship/differences in capital structure and profitability in poultry and
livestock investment and production in Abia state. According to Cassar and
Holmes (2003), lack of management skills, and the limited separation of business
decisions from personal purpose is another problem in poultry and piggery
production and investment as it concerns capital structure.
Abor (2005) looked
at the effect of capital structure on profitability of listed firms in Nigeria,
Kamau (2013) carried out a study to investigate the relationship between
capital structure and financial profitability of errand service SMEs in Nairobi
County. Boateng (2004) looked at the determinants of capital structure in
international joint ventures. Roshanak
(2013) looked at the effect of capital structure on the profitability of diary
sector. However, none of these studies have looked at the capital structure and
profitability of poultry and piggery enterprises which sometimes are affected
adversely by the financial crises as well as macro-economic factors and the
studies in the diary sector did not consider the difference that exists in the
capital structure and profitability of piggery and poultry investment. This
constitutes knowledge gap in the livestock sector that this study sought to
address. A study on the differences in the capital structure and profitability
of livestock enterprises, will help us to know which of the livestock
enterprises that could be recommended for investment to investors in livestock
production in Abia state.
1.3 RESEARCH QUESTIONS
The study aimed to
address the following research questions:
1. What
are the features of the selected livestock enterprises in the study area?
2. How
is the capital structure, investment level and performance of the selected
livestock enterprises (poultry and piggery) in the study area?
3. How
comparable is the level of capital structure, investment and performance of
poultry and piggery enterprises in Abia State?
4. What
are the determinants of the capital structure and the level of investment in
poultry and piggery enterprises in the study area?
5. What
are the factors that influence the preference of capital structure (equity or
debt) for investment by poultry and piggery enterprises in Abia state?
6. What
is the effect of capital structure on the performance of poultry and piggery
enterprises in the study area?
1.4 OBJECTIVES OF THE STUDY
The
major aim of this study was to analyse the capital structure and performance
differentials in poultry and piggery enterprises in Abia State, Nigeria. The
specific objectives were to:
i.
examine the features of poultry and
piggery enterprises in the study area;
ii.
determine the capital structure, investment
level and performance of poultry and piggery enterprises in the study area;
iii.
compare the level of capital structure, investment
and performance of poultry and piggery enterprises in the study area;
iv.
estimate the determinants of capital
structure and the level of investment in poultry and piggery enterprises in the
study area;
v.
estimate the factors that influenced the
preference of capital structure for investment by poultry and piggery
enterprise managers in Abia state;
vi.
estimates the effect of capital structure
on the performance of poultry and piggery enterprises in the study area.
1.5
HYPOTHESES
The following hypotheses guided the study:
H01: There is no significant difference in the level
of capital structure, investment and performance of poultry and piggery
enterprises in Abia State.
H02: Expected total expenditure requirement of the
business, profitability of the enterprise, size of the enterprise, business
environment, taxation, liquidity, the total assets’ turnover,
closely held ownership of enterprise, owner’s collateral, and age of the
poultry enterprise does not significantly influence the
capital structure of the selected livestock enterprises in the study area.
H03: Size of the enterprise, amount of
expenses on research and development, outstanding debt of the enterprise,
business stage, location of the enterprise, scale of operation, amount of
savings, profitability of the enterprise, access to loan, amount of savings,
amount of interest payment on loan, total expenditure requirement of the
business, and age of the business enterprise does not significantly
influence the investment level of the selected livestock enterprises in the
study area.
H04: Age of the enterprises, scale of operation, proximity to
bank/moneylenders/savings society, return on investment of the enterprise,
stock size, loan tenure, business stage, amount of available capital for investment,
interest rate charges, total expenditure of the business last year, access to
credit or grants, start-up capital requirement does not
significantly influence the choice of capital structure for investment by
poultry and piggery enterprises in Abia state.
H05: Capital structure does
not significantly influence the performance of poultry and piggery enterprise
enterprises in Abia state.
1.6 JUSTIFICATION OF THE STUDY
The
importance of capital structure in livestock investment has led to the
researcher’s interest in analysing capital structure in different livestock
enterprises. This is done in the belief that understanding the capital
structure and performance of enterprises helps in decision making as to the
best options for financing businesses that will maximize investment expectation
of any investor. (Adebayo and Adeola,2008). Profit making in livestock business
connotes the ability to increase farmer’s purchase power for additional
livestock inputs and adoption of new improved technology.
9-*Food
production through livestock farming has been viewed principally to support
this course. Since most studies on capital structure and profitability focuse
more on the large firms and the few that focused on SMEs did not consider the
livestock subsector so critically especially the poultry and piggery
enterprises, a study like this is necessary since examining the capital
structure and performance differences in poultry and piggery enterprises is a
necessary step towards dictating the enterprise with less access to debt
financing and that with good self-financing (equity financing) opportunity. Ibeagwa,
O.B; Nnamerenwa, G.C. and Anorue.P.C
(2012)
A
study like this is necessary to provide empirical evidence on the composition
of capital structure and investment behaviour of livestock enterprises;
comparison of the level of capital structure as well as the investment level of
poultry and piggery enterprises, comparison of the performance of poultry and
piggery enterprises; the effect of capital structure on the investment and
performance of poultry and piggery enterprises; the factors that influences the
choice of capital structure for investment by poultry and piggery operators;
and the factors militating against the choice of capital structure, investment
behaviour and performance of poultry and piggery enterprises.
The
study will also promote and improved livestock production and ensure increased
returns to the farmers to sustain their living standard. Results from studies
like this will be of immense relevance to livestock farmers, government and
other stakeholders in the agricultural industry. The result of this study is
expected to stimulate far reaching concern and draw attention to the need of
ensuring appropriate capital structure for livestock farming as an economically
relevant strategy for improving the performance and relevance of the poultry
and piggery enterprises. The result of the study will also act as a reference
to the government, farmers and investors in agriculture, non-governmental
organization, research institutes, government agencies and other corporate
bodies in their dealing with capital structure and performance of investment in
such livestock enterprises as poultry and piggery enterprises in Abia state.
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