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EFFECT OF FIRM-SPECIFIC
ATTRIBUTES ON FINANCE LEASE USE IN LISTED NON-FINANCIAL FIRMS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1
Background to the Study
The drive towards the achievement of set objectives; principal
of which includes maximisation of shareholders’ wealth, influences choices as
to source of long term funds and its efficient utilisation through investment
in assets for productive activities. The selection of a particular form of long-term
finance or a mix of choices, constitute what is commonly referred to as the
‘capital structure’ of corporate entities (Pratheepkanth, 2011). Discourse and
research on this conceptusually has at its fore, debt and equity studied as a
whole; equity being finance sourced through investment inshares of a company.
Debt in this regard, refers to interest based funds inclusive of those raised
through the issue of debt securities on the capital market and the contracting
of long or short term loans from the money market financial institutions such
as banks. A less discussed but important component of capital structure is
finance lease which is a peculiar asset-based form of debt financing resulting
in the acquisition of a physical noncurrent asset instead of liquid
cash(Kraemer-Eis & Lang, 2012). Consequently, a representation of a lease
liability as well as the corresponding leased asset is made on the statement of
financial position of firms. Besides the use of equity (shareholders’
investments), debt instruments or facilities and hire purchase agreements,
leasing is another finance avenue resorted to in asset acquisition where
substantial capital outlay is involved. As noted by Feldman (2002), an
industry, for instance aviation, which employs expensive high technology equipment,
rather than make an outright purchase from available resources or secure
procurement through regular debt, can opt for lease. 12 Leasing is an
arrangement whereby a party, lessee obtains the ri ght to
use an asset for a defined period of time in exchange for a consideration of
regular lease payments to another, a lessor (Yan, 2006). It makes for an
attractive source of finance due to its characteristic advantages. According to
Adebisi (2003) as cited in Oko and Essien (2014), there are opportunities for
cash conservation as the terms of payment for leased assets can be designed to
match the cash flow patterns of lessee entities. Akinsulire (2011) stated the
ease with which leasing agreements can be arranged especially for companies
with liquidity problems, poor collateral availability and payment track record
which constitutethe basis for credit worthiness assessments when other forms of
finance are being sought such as loans. Subsequent to this ease is the
flexibility with which lease terms, periodic payments and options to purchase
could be adjusted in contrast to conventional debt financing (Malik, Saeed,
Ahmed & Javed, 2012). The suitability of leasing by corporate bodies can be
seen in that it presents with less threat of loss of company control through
bankruptcy, or the dilution of shareholding associated with the use of either
debt or equity methods of financing (Owoeye, 2004).The Federal Inland Revenue
Service of Nigeria (FIRS) Circular (2010) highlighted the growing popularity of
leasing due to the domestic high costs of non-current assets, the shortage of
foreign exchange raising costs of its imports and the accessibility through
leasing, of a hundred percent (100%) credit financing. This is in contrast to
financial institutions providing a percentage of asset value in loans to be
augmented by the borrower. Wyslocka and Szczepaniak (2012) buttressed the point
of significant lease patronisation as it tends to be evident amongst firms of
varying scales and forms. Leasing has become a customised financing mechanism
employed by many sectors of an economy(Amembal, 2005). Oko and Anyanwu (2012)
noted the growth of lease industries to be above 10% annually in developed
countries such as the United States, United Kingdom and Japan. In Africa,
Wright (2004) pointed out the countries- Malawi, Uganda, Tanzania and Ghana as
having gained from international lease cooperation. Though the lease industry
of the continent is generally still gaining ground compared to what obtains in
the advanced economies, Nigeria, in addition to Morocco, Egypt and South
Africa, was placed among the top 50 countries in 2013 and 2014 by volume of
lease transactions valued at 0.68 and 0.50 billion dollars respectively (White
Clarke Group, 2015& 2016).Oko and Essien (2014) describedthe Nigerian lease
sectoras heterogeneous in size as well as form (small, medium and target ticket
markets) anddependent on the operations, buying capacity and management
orientation of firms. The Equipment Leasing Association of Nigeria (ELAN, 2015)
highlighted the relevance of this finance alternative to the Nigerian economy
given its contribution to capital formation in excess of 1.6 trillion
nairawithinthe years, 2000-2014. The lease industry in 2015 recorded a growth
rate of 27.39% with an outstanding volume of transactions valued at 1.1trillion
naira. Out of this, finance leases accounted for a significant 75%with serviced
industries including the oil and gas, transportation, manufacturing,
telecommunications and agriculture (ELAN, 2016).Collectively, these
industriescan also be discerned to have contributed to a consistent positive
growth rate in leasing between the periods 2007-2015 with only a stunt in
progression recorded from 2009-2012. In the literature of finance, the impetus
for leasing is well supported by the capital structure theories considering
certain attributes of firms.Modigliani-Miller Theorem(1958) initially proposed
the existence of perfectcapital markets devoid of taxes, transactioncosts,
bankruptcy costs, information asymmetries and agency costs facilitating fluid
access to finance by entities. The assumption of this state correspondingly implied
that it was irrelevant which method of financing an organisation used to
conduct its operations as it was presumed to have no varying effect on the
value of firms. With Fisseha (2010) noting the reality of the practical world
being that markets are in fact imperfect, it brings to light the constraints
associated with financial contracting and thus, capital structure, based on the
frictions that apply to respective organisations. Later deliberations on the
Modigliani-Miller Theorem gave rise to other theories of firm capital structure
that attempted to explain finance contracting in consonance with the identified
market imperfections that subsist. Theories such as the agency cost, pecking
order and bankruptcy costs consider these imperfections that are by extension,
either characteristics in themselves discernible of firms (information
asymmetry and agency costs) or a function of some (bankruptcy costs in the case
of financially distressed firms which in turn is a consequence of leverage
positions). The theories equally provide for firm attributes which are not
market imperfections but could explain choices of finance by firms
(profitability and growth opportunities). In the context of the pecking order
theory (Myers, 1984; Myers & Majluf, 1984), where information asymmetry
abounds, higher costs of capital may prevail due to the consideration of risk
(Cortez & Susanto, 2012).
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