An Empirical Analysis of Low-Leverage Behaviour: Evidence from Nigerian Quoted Firms

Debt conservatism is one of the enduring puzzles in capital structure research. The reluctance of profitable firms to commit to high debt ratios to exploit tax benefits of debt has profound consequences for capital structure dynamics. Inspired by studies examining the persistence of conservative debt usage by firms, this paper examines the low-leverage behaviour within the Nigerian context, where it is a largely unexplored area. Using a sample of 50 non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2019, the study documents the following findings. The mean (median) market debt ratio for the entire sample period was 27.5% (19.5%), corresponding to the 60th (50th) percentile. Firm-years with market leverage ratios ranging from 40% and downwards to zero percent met the criteria for inclusion in the observation of low leverage phenomenon (LLP). The mean (median) market debt ratio for the defined low-leverage sub-sample was 12.7% (9.6%). Conservative capital structure is evident across the 17 industries embodied in the sample, and debt conservatism is a declining function of rating, market timing, financing deficit, asset riskiness and firm size. Conservative behaviour increases with marginal tax rate, non-debt tax shields, growth, profitability, liquidity, uniqueness, age, relationship-specific investments and employee bargaining power. Both managerial conservatism and tax exhaustion appear to explain the LLP, with the former exerting greater impact.