CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

In corporate finance, the issue of funding has been given much prominence in the

activities of the firm. Corporate financing is a global issue because without proper

financing, organisations, globally, will find difficulty in conducting their businesses.

Almeida and Campello (2010) stated that corporate managers in Europe and the United

States have always claimed that maintaining „financial flexibility‟ is the primary

objective of their firm‟s policies. Financial flexibility ensures the continued running of

operations of an organisation; it brings sustainability, and continued growth for the firm,

which is expected to create wealth and add value to shareholders and stakeholders of the

organisation. Thus, funding is therefore very essential for the survival of a firm.

It is part of a mandatory role for companies in Nigeria to finance their businesses so that

they may be able to add value, remain in business and grow over time. Once businesses

are in operation, the general expectations are that profits will be generated which in turn

would lead to the creation of wealth to both the shareholders and the organisation. The

returns made are expected to be paid to the shareholders in the form of dividends. The

continued existence of the business allows employment to be created and employees to

be paid salaries thereby improving the standard of living of people. In addition, revenues

to be generated for the government through taxes and levies, which if fully utilised

effectively the stakeholders to also benefit both socially and economically. All these are

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expected to reduce the level of poverty in the country, create wealth for the economy, and

increase economic growth and development for the country.

Corporate financing decisions can be a complex process and existing theories can at best

explain only certain features of how diverse and complex financing choices can be. The

complexity of the financing decisions resulted to the choices of determining which

financing structure to adopt for the organisation and financing structure decisions

informed the issue of firm characteristics. Characteristics of the firm consists of the

combinations of debt, equity, fixed assets,total assets and turnover, which are used in