EFFECTS OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF LISTED OIL AND GAS FIRM IN NIGERIA
ABSTRACT
This research work seeks to examine the effects of capital structure on financial performance of listed oil and gas firm in Nigeria. The research used shareholders fund and profit after tax of the selected oil and gas as proxies to measure the financial efficiency of the oil and gas in both pre and post consolidation eras in Nigeria. Two oil and gas were selected for this study using simple random sampling methods. Data were collected from Academic journals, Nigerian stock exchange archive, text books, magazines, newspapers, companies’ annual reports, and internet sources and were subsequently analyzed using correlation and regression with the aid of Econometrics view (version 7). This research found out that “mergers and acquisition” is an effective means of ensuring the stability and profitability of the oil and gas sector , the study also found out that shareholders fund contributed significantly to the profit after tax of the oil and gas s, and that corporate restructuring has affected the capital adequacy of commercial oil and gas positively, It was also discovered that synergy gains are the key motive for oil and gas mergers.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study 4
1.2 Statement of the Problem 6
1.3 Objectives of the Study 7
1.4 Research Questions 7
1.5 Research Hypotheses 8
1.6 Significance of the Study 8
1.7 Scope of the Study 9
1.8 Operational Definition of Terms 9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.0 Introduction 10
2.1 Mergers and Acquisition 10
2.1.1 Form(s) of Corporate Mergers and Acquisition 11
2.2 Capital Structure 12
2.3 Firm Performance 13
2.4 Theoretical Framework 14
2.4.1 Efficiency Theory 14
2.4.2 Agency Theory 15
2.4.3 Diversification Theory 16
2.5 Empirical Review 16
2.6 Synthesis of Empirical Studies 25
2.7 Gap of Study 34
CHAPTER THREE: RESEARCH METHODOLOGY
3.0 Introduction 36
3.1 Research Design 36
3.3 Population of the Study 36
3.4 Sample and Sampling Technique 36
3.5 Method of Data Collection 37
3.6 Method of Data Analysis and Model Specification 37
3.7 Limitations of the Study 40
CHARPTER 4 DATA PRESENTATION, ANALYSISAND DISCUSSION OF RESULTS
4.1Presentation of Data 41
4.1.1 Descriptive Statistics 41
4.1.2 Correlation Analysis 42
4.3 Diagnostic Tests 43
4.3.1 Multicollinearity test 43
4.3.2 Omitted variable test 44
4.3.3 Normality plot 44
4.3.4 Hausman test 44
4.3.5 Breusch-Pagan L M test 45
4.3.6:Heteroskedasticity, serial correlation (autocorrelation), and cross-sectional Independence test 46
4.3.7 Choice of model analysis 48
4.4 Test of Hypotheses 49
4.4.1 Hypotheses 1: 49
4.4.2 Hypotheses 2: 50
4.4.3 Hypotheses 3: 50
4.5 Discussions 51
CHAPTER 5 SUMMERY OF FINDING, CONCLUSION AND RECOMMENDATIONS
5.1 Summery of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
5.4 Suggestions for further studies 55
5.5 Contribution to Knowledge 55
References 57
Appendices 62
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Oil and Gas industry have contributed immensely to the growth and economic development of Nigeria (NBS, 2017). The industry pursues her profit maximization motive with keen interest to satisfy their shareholders. However, their activities are directly and indirectly affecting the green environment where they operate. The severity of environmental problems has its adverse effects on their employee welfare and other stakeholders’ quality of life.
Measures are being taken both at the national and international level to reduce, prevent and mitigate the adverse effect of Oil and Gas on the green environments (GRI, 2002; GR1, 2006).
This has serve as a wakeup call to all Oil and Gas firms to protect both human and natural environments in which they are operating. Dimowo (2010) observed that companies in pursuit of profits can do great social harm and the environment suffers, thus, there is an emphasis for a meeting point between corporate objective of profit maximization and the need for environmental management.
Recently more companies disclose information about their environmental performance according to stakeholder demands of environmental responsibility and accountability. Environmental disclosure may be defined as any information that a firm makes public, typically within or alongside its annual report that relates to its performance, activities under the corporate social responsibility of the firm. Such reports are most commonly known as sustainability reports, but they are also known as corporate social responsibility reports, eco-reports and corporate accountability reports (Dyllick & Hockerts, 2016). Voluntary disclosures of environmental information by firms have become increasingly imperative issue of academic research in lots of countries. These reports are believed to communicate important information concerning the extent to which a firm's activities are sustainable, seen as one which can service the demands of all its stakeholders without limiting its ability to meet the needs of any potential future stakeholders by maintaining its base of environmental, social and economic capital (Bassey, Sunday & Okon, 2013).
Oil and gas companies that have been banking on transparency through information disclosure are progressing at the heart of a number of global environmental governance initiatives. The requirements of environmental standards, issued by International Organization for Standardization (ISO) have been the basis to several researches on environmental responsibility. It is argued by Saha & Akter (2013) that environmental information disclosure gives more transparency to the annual report at large. Environmental accounting also serves as a provider of environmental information to internal and external parties. It also functions internally (Environment Management Accounting or EMA) to provide information to aid management in improving environmental performance of their firm, while function of external environmental accounting (Environment Financial Accounting or EFAs) is present information to external parties or company stakeholders. Environmental disclosure is generated by environment accounting system which is part of overall environmental information that is disclosed by company (Ngwakwe, 2018).
In Nigeria, the confidence restored to oil and gas customers via mergers and acquisitions (M&A) from 2006 to date has made it a formidable force to reckon with in the oil and gas industry. It is also to note that in Nigeria, reforms in the oil and gas industry preceded against the backdrop of the oil and gas crisis which was connected with highly undercapitalization of purchase oil and gas, weakness in regulatory and supervisory frameworks, weak management practices and tolerance of deficiencies in corporate governance behaviour of oil and gas (Tarila & Ogege, 2019). Though oil and gas reforms reduced the competitiveness in the oil and gas industry; however, it further strengthened the industry by way of enhancing oil and gas s’ capital structure.
The oil and gas industry plays a very significant role in economic development via the channeling of scarce financial resources from surplus units to deficit units. oil and gas implement M&A to expand, diversify and reduce the number of competitors and to have a viable capital structure, such that they can partake in both local and global markets for high business growth (Alin, Sabina & Nicu, 2021; and Santulli, Gallucci, Torchia & Calabro, 2020). According to Hu, Lu, Hui and Xing (2020), M&A refers to two or more corporate entities coming together to constitute one entity in order to expand synergy. Khan, Soundararajan and Shoham (2020) opined that the prime aim of M&A is to build shareholders’ wealth via expanded synergies and that the synergies translate into reduction in cost of production (operational synergy), costs of capital (financial synergy) and price (collusive synergy); this study is centered on the financial aspect of M&A.
oil and gas occupy central position in the country’s financial system and are essential agents in the development process. By inter-mediating between the surplus and deficit units in an economy, oil and gas mobilize and facilitate efficient location of savings, thereby increasing the quantum of investments and hence national output (Afolabi, 2016). Through financial inter-mediation, oil and gas facilitate capital formation (investment) and promote economic growth. The decade 1995 and 2005 were particularly traumatic for the Nigeria oil and gas industry, with the magnitude of distress reaching an unprecedented level, thereby making it an issue of concern not only to the regulatory institutions but also to policy analyst and the general public. Thus, the need for a drastic overhaul of the industry was quite apparent.
In furtherance of the general overhauling of the financial system, the Central oil and gas of Nigeria (CBN) introduced major reform programs that changed the oil and gas landscape of in 2004. The main thrust of the 13-point reform agenda was the prescription of minimum shareholders fund of N25 billion for Nigeria deposit money oil and gas not later than December 31, 2005. In view of the low financial base of these oil and gas s, they were encouraged to merge (Fabinu, Jonny & Agbatogun, 2018). Solodu (2014) opined that the CBN choose to begin the Nigeria oil and gas sector reforms process with the consolidation and recapitalization policy through M&A. This is done in order to arrest system decay, restoration of public confidence, building of strong and competitive players in the global arena, ensuring longevity and higher return to investors.
Considering the inability of most Nigeria oil and gas to perform well due to operational hardship, expansion bottlenecks as a result of heavy, fixed and operating costs coupled with volatility between deposits and lending rates, the present oil and gas sector reforms in Nigeria was announced by professor Chukwuma Soludo, the then CBN governor on July 6th, 2004 with the objective of creating a sound and more secure oil and gas system that depositors can trust through mergers and acquisition which enhanced operational capital base (Hassan & Lukman, 2020). These and many more, act as springboard to achieving improving performance. It is in record that between 1990 to date, Nigeria witnessed several M&A arrangements. This trend changed particularly from 1995. In 1997 alone, about ten (10) M&A were recorded whereas as at 31st December, 2005 the Nigeria oil and gas sector witnessed 25 mergers activities (Odetayo & Olowe, 2013). Thus, M&A was a new scheme geared in repositioning oil and gas for more efficiency and reliability via strengthening the industry with its position multiplier effects on the economy.
Furthermore, by the introduction of 25-billion-naira deposits by the individual oil and gas by the CBN as a credit asset, oil and gas which could not cope up were either merged, acquired or taken out from the system (Omotayo, 2019). Without doubt, M&A has proved to be a masterstroke and a big advantage as it has not only engendered greater confidence in the oil and gas system among the depositing public but has also resulted in the enthronement of a regime of healthy, strong, viable and competitive oil and gas institutions as well as improving in the capital structure of oil and gas (Tarila & Ogege, 2019; Taiwo & Musa, 2014).
In the views of Ogebe, Ogebe and Alewi (2013); capital structure refers to a mix of debt and equity that an entity employs in financing its operations. It has been a fundamental issue in finance ever since Modigliani and Miller (1958) postulated that given frictionless markets, homogeneous expectations, l of entities are irrelevant (Onaolapo & Kajola, 2010; Akinlo, 2011). According to Yinusa, Ismail, Yulia and Olawale (2019), capital structure could have two effects on firms; first, firms with same risk class could likely have greater costs of capital with higher leverage; and second, it may affect the value of the entity, with more leveraged oil and gas being riskier. Consequently, it is against this background that the study attempts to assess M&A as a tool for survival in the post consolidation era of Nigeria oil and gas industry with the aim of assessing its effect on the capital structure of oil and gas in Nigeria.
1.2 Statement of the Problem
The outbreak of oil and gas in Nigeria is attracting much attention, partly because of heightened interest in what motivates firms to merge and how affects performance or efficiency. However, the study investigates the capital structure and financial performance of oil and gas. It is motivated by the relative dearth of empirical evidence on the impact of capital structure and financial performance. Broadly, handful of studies on activities in the Nigeria oil and gas industry provide mixed results. For instance, Altunbas and Ibanez (2024) reported that oil and gas mergers taking place in the oil and gas industry do lead to improved profitability. On the other hand, Vander (2016) reported a limited improvement in profit efficiency but not with reference to cross-border deals.
According to Pilloff and Santomero (2017), there is little empirical evidence of merger achieving growth or other important performance gains. Evidence supporting the costs saving and efficiency gain is sparse (Beitel, 2013; and Abdelrahman & Elgiziry, 2019). In general, these studies provide mixed evidence and inconclusive evidence which appears counter-initiative and many fail to show a clear relationship between capital structure and financial performance. This study intends to investigate empirically, the potency of survival strategy of oil and gas in enhancing capital structure and financial performance.
1.3 Objectives of the Study
The broad objective of this study is to investigate the effects of capital structure and financial performance of oil and gas in Nigeria. The intended specific objectives are:
i. To assess the effects of capital structure of Nigerian oil and gas.
ii. To determine the effects of capital structure on the financial performance of Nigerian oil and gas.
iii. To ascertain whether capital structure guarantee the survival and growth rate of Nigeria oil and gas in the long run.
1.4 Research Questions
The following research questions will guide the study:
i. To what extent do capital structure affect Nigerian oil and gas?
ii. What is the effect of capital structure on the financial performance of Nigerian oil and gas?
iii. To what extent does capital structure guarantee the survival and growth rate of Nigeria oil and gas?
1.5 Research Hypotheses
In line with the specific objectives of the study, the following research hypotheses will be tested:
Ho1: There is no significant relationship between capital structure and Nigerian oil and gas.
Ho2: There is no significant relationship between capital structure and financial performance of Nigerian oil and gas.
Ho3: There is no significant relationship between capital structure with survival and growth rate of Nigeria oil and gas.
1.6 Significance of the Study
This study will contribute its quota to the clamour for oil and gas in Nigeria to embrace as a strategic business policy for their survival and growth, especially in the present day highly competitive global environment. The study will be useful to management, regulatory authorities of the oil and gas industry and researchers alike. For management, the study will serve as a means of determining how oil and gas can engage in merger in order to improve on their capital structure and performance. For the regulatory authorities, it will provide an insight into whether oil and gas would have ordinarily merged among themselves without any ‘coercion’ or ‘arms twisting.’ It is hoped that the study will serve as a rallying point for future discussion or at least a point of departure for future researchers in the field of accounting and finance.
1.7 Scope of the Study
This study intends to investigate the effects of capital structure and financial performance of oil and gas in Nigeria. The study will cover eleven (11) year periods, from 2014-2024. In doing this, the study will look at some of the variables of both dependent (natural logarithm of net profits after tax, leverage, and revenue growth rate) and independent (natural logarithm of asset-base). Thus, performance will be measured using natural logarithm of net profits after tax, growth and survival of Nigeria oil and gas in the long-run by revenue growth rate, capital structure by leverage (short, long and total debt ratios)while mergers and acquisition will be used using the natural logarithm of asset-base of oil and gas. Data will be obtained from the annual reports and accounts of oil and gas.
1.8 Operational Definition of Terms
- Acquisitions: This refers to an asset obtained or bought by an organization, which do not necessarily result to a single entity.
- Capital Structure: This refers to a mix of the debts and equities of corporate entities.
- Mergers: This refers to a combination of two or more organizations to become a single entity.
- Performance: This refers to the functioning or ability of corporate entities to determine how well they have carried out their operations effectively and efficiently.
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