The impact of debt financing on value of firms in developing countries: a lesson from Nigeria

Present and potential investors need information for their investment decisions, which include the value creating potential of relevant firms. This information helps the investor to estimate the value of the firm which in turn aids the process of investment decision making. At the same time, management of the relevant firm pay serious attention to the composition of the firm’s financial structure as failure to achieve an optimal financial structure may lead to insolvency and financial distress. These can ultimately lead to bankruptcy. It was against this background that this paper examined the impact of debt finance on the value of Nigerian firms adopting a bankruptcy model. The study relied on historic accounting data obtained from the financial statements and accounts of 28 quoted firms on the Nigeria Stock Exchange and covered the period 2004 – 2008. A bankruptcy model, the Multiple Discriminant Analysis (MDA) was used and a benchmark Z-score of 2.675 was established in classifying firms as either having enhanced value or not. The results revealed that while twenty firms had value created as a result of external funds in their financial mix; eight firms did not create value under the same condition. Therefore, the use of debt finance enhances the value of firms. These should be encouraged for firms in developing countries in order that they will meaningfully contribute to their economic growth and development.