Empirical Test of Trade Off Theory and Pecking Order Theory as Determinants of Corporate Leverage: Evidence from A Panel Data Analysis Upon Nigerian SMEs

Yusuf Olatunji OYEDEKO, Muhammed ZUBAIRU

Abstract

The study examines Pecking Order Theory and Trade Off Theory as determinants of corporate leverage within a context of small and medium scale enterprises in Nigeria using Expos-facto research design. This study employs secondary data which were extracted from the audited financial reports of the listed small and medium enterprises within the period of the study for the period of eight years spanning from 2010 to 2017. The data were analysed using regression analysis. The study found that profitability and liquidity have positive effect on corporate leverage while firm size and growth have negative effect on corporate leverage.The study concluded that trade of theory has superiority on pecking order theory as regards to determinant of corporate leverage using data collected from financial statement of small and medium scale enterprises that are listed on the Nigerian stock Exchange. In view of this, the study recommends that small and medium enterprises should make use oflong term debt instead of short-term debt in there capital structure in financing investment opportunity in order to earn more profits. Also, other Islamic mode of financing such as mudaraba, ijara among others should be employed as an alternative ways of financing investment opportunity.

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