MBA Project - YSG - Complete 2019 - 07

EFFECT OF COST OF CAPITAL ON FINANCIAL PERFORMANCE OF LISTED
CONSTRUCTION COMPANIES IN NIGERIA
BY
YUSUF SHEHU GIWA
(NDA/PGS/FASS/MBA/357/16)
DEPARTMENT OF ACCOUNTING AND MANAGEMENT
FACULTY OF ARTS AND SOCIAL SCIENCES
NIGERIAN DEFENCE ACADEMY,
KADUNA, NIGERIA
JUNE, 2019
EFFECT OF COST OF CAPITAL ON FINANCIAL PERFORMANCE OF LISTED
CONSTRUCTION COMPANIES IN NIGERIA
BY:
YUSUF SHEHU GIWA
(NDA/PGS/FASS/MBA/357/16)
BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF
ACCOUNTING AND MANAGEMENT, FACULTY OF ARTS AND SOCIAL SCIENCES,
NIGERIAN DEFENCE ACADEMY, KADUNA IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION
(MBA).
NIGERIA
JUNE, 2019
i
DECLARATION
I hereby declare that this Research Project titled “Effect of Cost of Capital on Financial
Performance of Listed Construction Companies in Nigeria” is the product of my research effort
and it is original. Authors whose works were referred to have been duly acknowledged in the
reference.
YUSUF SHEHU GIWA ___________________ _________________

(NDA/PGS/FASS/MBA/357/16) Signature Date
ii
CERTIFICATION
I hereby certify that this research project titled “Effect of Cost of Capital on Financial
Performance of Listed Construction Companies in Nigeria” by YUSUF SHEHU GIWA
(NDA/PGS/FASS/MBA/357/16) was supervised by me.
Dr. AA Alexander ________________ _______________

Supervisor Signature Date
iii
APPROVAL
This research project has fulfilled the partial requirements for the award of Master of Business
Administration (MBA) in the Department of Accounting and Management, Faculty of Arts and
Social Sciences, Nigerian Defence Academy, Kaduna and is hereby approved.
Dr. AA Alexander ___________________ _________________

Lead Supervisor Signature Date
Dr. J. Okpanachi ___________________ _________________

Head of Department Signature Date
___________________ ___________________ _________________

External Examiner Signature Date
Prof. YA Umar ___________________ _________________

Dean, PG School Signature Date
iv
DEDICATION
This research is dedicated to my late father, Dr. Shehu Lawal Giwa (Marafan Zazzau) and my
late mother Hajiya Maryam Shehu Giwa, may the Almighty Allah have mercy on them and
reward them with a place in Jannatul-Firdaus.
v
ACKNOWLEDGEMENTS
All thanks is due to Allah, the most Gracious, and the most merciful for giving me the life, health
and wisdom to do this work. And may peace and blessing of Allah be upon the last of the
prophets, Muhammad (S.A.W), his family and all his companions.
First, I would like to express my heartfelt gratitude and indebtedness to my supervisor Dr. AA.
Alexander for his constructive criticism, guidance and encouragement. Special thanks to our
amiable Head of Department Dr. J. Okpanachi and all our lecturers. Sincere thanks to Dr. AO
Yahaya for his invaluable contribution towards my academic research works in the Nigerian
Defence Academy.
My sincere appreciation to my family and friends/colleagues at Nigerian Defence Academy
NDA who were always supporting me with physically and psychologically.
vi
TABLE OF CONTENTS
TITLE PAGE i
DECLARATION ii
CERTIFICATION iii
APPROVAL iv
DEDICATION v
ACKNOWLEDGEMENTS vi
TABLE OF CONTENTS vii
LIST OF TABLES x
LIST OF FIGURES xi
LIST OF APPENDICES xii
ABSTRACT xiii
CHAPTER ONE – INTRODUCTION 1
1.1 Background to the Study 1
1.2 Statement of the Problem 2
1.3 Research Questions 4
1.4 Objective of the Study 4
1.5 Hypotheses of the Study 5
1.6 Significance of the Study 5
1.7 Scope of the Study 5
CHAPTER TWO – LITERATURE REVIEW 7
2.1 Introduction 7
2.2 Conceptual Review 7
vii
2.2.1 Financial Performance 8
2.2.2 Cost of Capital 9
2.3 Theoretical Reviews 10
2.3.1 Nigerian Construction Industry and the Economy 11
2.3.2 Major Loopholes in Nigerian Construction Industry 13
2.3.3 Cost of Capital for Construction Companies in Nigeria 16
2.3.4 Theories 17
2.4 Empirical Review 22
2.5 Gap in the Literature 40
CHAPTER THREE – METHODOLOGY 41
3.1 Introduction 41
3.2 Research Design 41
3.3 Population 42
3.4 Model Specification 42
3.5 Variables Definition and Measurement 43
3.6 Sources and Methods of Data Collection 46
3.7 Data Analysis Techniques 46
3.8 Diagnostic Tests 47
3.8.1 Linearity Test 47
3.8.2 Independence of Observations (Autocorrelation Test) 48
3.8.3 Multicollinearity Test 49
3.8.4 Heteroscedasticity Test 49
3.8.5 Panel Effect Test 50
viii
CHAPTER FOUR – DATA PRESENTATION AND ANALYSIS 51
4.1 Introduction 51
4.2 Descriptive Statistics 51
4.3 Diagnostic Tests and Regression Analysis 53
4.4 Test of Hypotheses 64
4.5 Discussion of Findings 64
CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATIONS 66
5.1 Summary 66
5.2 Conclusion 67
5.3 Recommendations 68
5.4 Limitations and Further Studies 69
LIST OF REFERENCES 70
APPENDIX 1 – ANALYSED RAW DATA 77
ix
LIST OF TABLES
Table 1: Nigeria Construction Industry Contribution to Real Sector GDP
Table 2: Summary of Studied Empirical Literatures
Table 3: Descriptive Statistics
Table 4: Test for Autocorrelation – Equation 1
Table 6: Tolerance/VIF for Multicollinearity – Equation 1
Table 8: Test for Heteroscedasticity – Equation 1
Table 10: Panel Effect Test – Equation 1
Table 12: OLS Regression Result – Equation 1
Table 14: Summary of Regression Coefficients and P-values
x
LIST OF FIGURES
Fig. 1: Conceptual Framework of the Research
Fig. 2: Linearity Test ROA against COD
Fig. 3: Linearity Test ROA against COE
Fig. 4: Linearity Test ROE against COD
Fig. 5: Linearity Test ROE against COE
xi
LIST OF APPENDICES
Appendix 1 – Analyzed Raw Data
xii
ABSTRACT
This research examines the effect of cost of capital (cost of debt and cost of equity) on financial
performance of construction companies listed on the Nigerian Stock Exchange. It covers the four
listed construction firms in Nigeria (Arbico Nigeria Plc, Julius Berger Nigeria Plc, Roads
Construction Nigeria Plc and UPDC), between the periods 2008 to 2017. The study uses
descriptive statistics and Multiple Linear Regression to test the hypotheses. Diagnostic tests of
Linearity, Autocorrelation, Multicollinearity, Heteroscedasticity and Panel Effect was conducted
to test the suitability of the regression model. Two equations were generated from the research
model. Equation 1 has Return on Asset as the dependent variable with Cost of Debt and Cost of
Equity as independent variables. Equation 2 have Return on Equity as the dependent variable and
the same variables as equation 1 for the independent variables. The regression analysis shows
that Equation 2 (with ROE as dependent variable) is not fit, hence Equation 1 was adopted for
the test of hypotheses. The results reveal that cost of debt has insignificant negative effect on
financial performance of the construction companies on one side. However the results reveal that
cost of equity has a significant positive effect on financial performance of the construction
companies. The research recommended that companies should put more emphasis in obtaining
financial equity capital rather than debt capital given that equity capital has positive effect on
firms’ performance while debt capital has negative effect even though it is insignificant. The
research also recommended government should introduce a criteria, in which any company that
needs to bid for a project of hundred million naira and above, must be listed in the NSE.
xiii
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The construction industry of a country is one of the leading drivers of its economic development.
From New York to London, Hong Kong to Tokyo etc, all these economic capitals are shaped and
defined by the power of its infrastructural development. Infrastructural development provides the
enabling environment for economic development. Dantata (2008) argued that almost all other
sectors of the economy in one way or another depend on the products and services of the
construction industry in order to carry out their operations.
Undoubtedly the construction industry is certainly the life wire of economic activities world over
and the Nigerian construction industry is not an exception to this. Its contribution ranges from
enabling the procurement of goods and services to the provision of infrastructures, thereby
providing employment opportunities to its labor force while contributing enormously to the GDP
(UK Essay, 2018). Dantata (2008) also asserted that the construction industry is considered by
some economists as a leading driver of economic development in a country. This is basically due
to the fact that almost all other sectors of the economy in one way or another depend solely on
the products and services of the construction industry in order to carry out their operations
Isa, Jimoh and Achuenu (2013, p.2) state that.
“Organized construction contracting in Nigeria began in the 1940s with few foreign companies
coming into operation. Nigeria’s independence in 1960 bolstered by the “oil boom” of the 1970s
brought an upward surge in the construction activities and up to the end of the second Republic
1
in 1983, the construction industry has witnessed an overwhelming upsurge in construction
contracting dominated by expatriate companies with few indigenous companies. Unfortunately,
the period also exposed the country’s indigenous companies low level of human resources
capacity required for; planning, designing, constructing and maintaining the magnitude of
projects conceived by the government”
However, the story is different in Nigeria, the size of the industry is very small relative to the
overall global construction industry. Dantata (2008) posited that the value of global construction
today is estimated to be about $4 trillion. Nigeria has a total value of about $3.15bn in 2008,
representing only about 0.08% of the global total. Despite this, it is by far the highest among all
other West African countries. The industry growth rate is projected to continue to grow at high
rates as long as oil prices remain high and government's investments in infrastructure also
remains high.
1.2 Statement of the Problem
The construction industry role in the Nigerian capital market is nothing to write home about. As
at 2008, there were only 8 construction companies listed in the NSE (Dantata, 2008), and by
2017, the number of listed construction companies crumbled to only four. Also, the most
disappointing fact is that only one of the listed companies (UPDC) is owned by Nigerians.
The million dollar question among the industry players is and has always been why the
construction industry in Nigeria is far behind where it should be? Is the problem from the
government, the people or from the construction companies? And what is the nature of the
2
problem? As a player within the industry, the researcher knows for sure that the industry is very
lucrative and from business point of view every profitable venture which would naturally attract
investors, improve to industrial growth.
Considering the current trend and happenings in the construction industry, we have to say that
two of the major problems hindering development of the industry in Nigeria are:
i. Poor policy implementation and;
ii. High cost of capital and unfriendly access to the capital.
Relatively adequate policies needed for a sustainable growth and development of the industry are
there but implementation remains a bottleneck. And accessing capital has always been a problem
for businesses in Nigeria. The average bank lending rate in the country stands between 25-35%.
This is obviously unrealistic giving that you must get a profit of at least 50% in order to break
even without even making profit because the Value Added Tax and Company Income Tax for
the construction industry ranges from 10-15%.
Given the aforementioned problems, the researcher was compelled to look at effect of cost of
capital on the financial performance of construction companies in Nigeria. Specifically the
researcher seeks to examine the magnitude and direction of the effect of the two key components
of capital (debt and equity), in order to distinguish the impact each has on the companies’
performance so as to help managers and other stakeholders in deciding whether to seek for debt
or equity capital as a source of finance.
3
After review of several theoretical and empirical studies and to the best of my knowledge, I
could not find any previous study ever conducted on the effect of capital cost on financial
performance of construction firms in Nigeria. Even if we are to widen the scope by replacing the
construction firms with all sector companies in Nigeria, all the previous studies only focused on
impact of either cost of debt alone, or cost of equity alone or use weighted average cost of capital
(WACC) as a measure for firms cost of capital. None of the previous studies take the cost of debt
and cost of equity independently in one model to measure the cost of capital.
1.3 Research Questions
i. Does cost of debt have significant effect on financial performance of listed construction
companies in Nigeria, and is it a positive or negative effect?
ii. Does cost of equity have significant effect on financial performance of listed construction
companies in Nigeria, and is it a positive or negative effect?
1.4 Objective of the Study
Overall objective of the research is to examine the effect of cost of capital on financial
performance of listed construction firms in Nigeria. Specifically the research seeks to examine:
i. The effect of cost of debt on financial performance of listed construction companies in
Nigeria.
ii. The effect of cost of equity on financial performance of listed construction companies in
Nigeria.
4
1.5 Hypotheses of the Study
In line with the research objective, the following null hypotheses have been formulated:
i. Ho1 - Cost of debt has no significant effect on financial performance of listed construction
companies in Nigeria.
ii. Ho2 - Cost of equity has no significant effect on financial performance of listed
construction companies in Nigeria.
1.6 Significance of the Study
This study will contribute immensely towards full understanding of the relationship and effect of
the cost of debt and cost of equity on the financial performance of construction companies in
Nigeria and other countries at large. It will give an insight and a blue print to prospective
investors and players within the industry on how to best make investment decisions. The
research will help the industry corporate managers in deciding the type and quantum of capital
they should be seeking for in their respective companies (debt or equity capital).
The research will also be beneficial to researchers and academicians by creating a platform for
further research study on the topic. It will also act as a resourceful tool for other academicians
who intend to undertake the same topic in their area of specialization.
1.7 Scope of the study
The study is composed of two dependent variables as proxy of financial performance (ROA and
ROE) and two focus independent variables (cost of debt and cost of equity). Other control
independent variables (leverage, size and growth) which are all measures of financial
5
performance were also used. Target population for the study is the four (4) Construction
Companies listed in the Nigerian Stock Exchange (NSE) as at 2017 (Arbico Nigeria Plc, Julius
Berger Nigeria Plc, Roads Construction Nigeria Plc and UACN Property Development
Company-UPDC). The study will focus on the last ten (10) years from 2008 to 2017.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This section covers conceptual definitions and framework for the research, and also narrates the
different theoretical reviews and the theories upon which the study was conceived from. Key
previous empirical studies on the topic were exhaustively reviewed and synthesized. The section
also extract out the discovered gap in previous studies.
2.2 Conceptual Review
The conceptual review provides a concise guide on the concepts adopted for the study variables.
The definitions were established from previous research works and field survey. Below are the
conceptual definitions upon which the variables were used in the research.
COST OF CAPITAL FINANCIAL PERFORMANCE
Cost of Debt Return on Asset
Cost of Equity Return on Equity
Size
Leverage
Growth
CONTROL VARIABLES
Fig. 1: Conceptual Framework of the Research
7
2.2.1 Financial Performance (Dependent Variables)
a. Return on Asset (ROA)
Pouraghajan, Tabari, Ramezani, Mansourinia, Emamgholipour and Majd (2012) use
ROA to measure corporate performance of firms listed on Tehran Stock Exchange. They
defined ROA as investment return in assets, which represents the amount of profit that
can be made use of corporate assets. Van Horne 2005 in Islam, 2014, also define ROA as
the profitability on the assets of a bank after all expenses and taxes.
Siddik, Kabiraj and Joghee (2017) also use ROA as a proxy for Financial Performance.
They explained ROA as a picture of how effective the management of the bank is in
generating profits with its available assets. The ROA measures how much a firm is
earning for each naira invested in the assets of the firm after all expenses and tax. That is,
it measures net earnings per unit of a given asset, moreover, how bank can convert its
assets into earnings.
ROA was used by Mohamad and Saad (2012) as the proxy for firm profitability given
that it was one of the preeminent measurements for corporate performance as they
argued.
b. Return on Equity (ROE)
ROE is the percentage return on equity, which corresponds to the division of net profit
and equity (Net Profit / Equity) as stated by Raja and Dave (2015). Pouraghajan et. al.
(2012) use ROE to measure corporate performance of firms listed on Tehran Stock
Exchange. ROE shows how much return has been created from the funds invested by
investors and also represent the real cost of use of invested funds.
8
ROE is another good measure of bank performance as used by many researchers. ROE
measures how effectively shareholders’ funds are being used by the management of the
corporate entities. Hall and Weiss, 1967 (in Siddik, Kabiraj & Joghee, 2017), while
favouring ROE, argued that, due to the existence of an optimal borrowing level, ROA
may vary amongst industries whilst ROE tends to be equal and thus offers a better
measurement.
ROA and ROE are without a doubt among the most widely used accounting criteria for
measuring financial performance. The overall value of a company is its assets and overall
shareholders’ investment of a company is the equity. Both ROA and ROE are the key measures
in calculating the rate of return on the asset and equity.
2.2.2 Cost of Capital (Independent Variables)
Cost of capital is the price of external financing and therefore the investors’ required rate of
return. It is also referred to as the price of obtaining fund/capital. It is the rate which is paid for
the use of capital (Ibrahim, 2015). Debt and Equity are the only source of firms financing (Rad,
2014), and hence the only components of the cost of capital.
a. Cost of Debt (CoD)
When companies borrow funds from outsiders or take debt from financial institutions
or other sources the interest paid on that amount is called cost of debt (Lucky, 2017).
The cost of debt can be computed by taking the rate on a risk free bound whose
duration matches the term structure of the corporate debt, then adding a default
9
premium. Rad (2014) deduce that CoD is the interest that should be paid by
businesses to borrow money.
The Independent Variable of the research is the cost incurred for debt (which is a
component of capital structure), otherwise known as outsiders’ funds, liabilities or
borrowed funds comprising of short-term (current liabilities), customer deposits,
long-term liabilities and other liabilities as compiled by the reporting institutions
(Abubakar, Shaba and, Yaaba, 2016).
b. Cost of Equity (CoE)
Cost of Equity is often used as a proxy for an opportunity cost of shareholders’
investment, generally valued by the security market interest rate (Tsai & Chen, 2015).
Rad, 2014, also opined that CoE is the amount of money that should be paid to
investors.
Most previous studies used Weighted Average Cost of Capital (WACC) as a measure for firms
cost of capital. For the purpose of this study, I am taking the cost of debt and cost of equity
individually as separate independent variables. This will give an independent effect of each of
the variables on the financial performance, enhance the model data and hence improve the
overall result.
2.3 Theoretical Reviews
Players in the industry are different group of individuals often assembled into temporary teams
and may comprise of Government and Private Clients, Architects, Engineers, Quantity
10
Surveyors, Builders, Estate Surveyors, Project Managers. Suppliers, Laborers, Contractors,
Artisans etc. Dantata 2008 outlines the key players in the Nigerian construction industry, viz:
i. Major Client – The Government, Private Clients.
ii. Major Companies – Julius Berger Nig. Plc, Dantata & Sawoe Construction Company,
China Civil Engineering Construction Corporation Nigeria Ltd, Setraco Nigeria Ltd,
Costain West Africa Plc, PW Nigeria Ltd, Reynolds Construction Co. Nigeria Ltd
RCC.
iii. Other Key Players – Federation of Construction Industry of Nigeria (FOCI), Trade
Unions, Council for Regulation of Engineering in Nigeria (COREN), etc.
2.3.1 Nigerian Construction Industry and the Economy
Nigeria's economy is one of the largest in Africa and has the potential to be among the strongest
in the world given the amount of natural and human resources that the country is blessed with.
According to the latest World Bank ranking, Nigeria's economy ranks as the 41st largest in the
world (Kolapo, 2008). However, despite significant improvements in all major sectors, the
economy is still heavily dependent on the oil sector, which accounts for 99 percent of export
revenues, 85 percent of government revenues, and about 52 percent of GDP (Dantata, 2008).
Ayangade (as cited in UK Essay, 2018) states that the contribution of the Nigerian construction
industry is yet to measure up to those of the western world like the UK and Australia due to its
developing nature. He further states that the construction industries of other developed countries
are responsible for about 22% of their respective GDP’s, but the Nigerian case is different, as it
contributes slightly below 16% to its economy.
11
Also, the construction industry role in the Nigerian Capital is nothing to write home about. As at
2008, there were only 8 construction companies listed in the NSE: Julius Berger Nig. Plc., Cappa
& D'Alberto Plc., Dumez Nig. Plc., Costain (WA) Plc., G. Cappa Plc., Impresit Bakolori Plc.,
Arbico Plc., and Road Nig. Plc. The overwhelming majority of the other companies are either
limited liability companies, privately owned companies, or foreign companies that may or may
not be public companies. And in 2004, the combined contribution of all the companies to the
turnover of the Nigerian Stock exchange was a mere 0.1% (Dantata, 2008).
However, the number of listed construction companies crumbled from eight in 2008 to only four
in 2017. This is certainly a discouraging fact in the development of the industry. From the GDP
from 2008 to 2017 as presented by the Central Bank of Nigeria (Table 1), the construction
industry contribution to the GDP was an average of merely 3% over the last ten years. This is
way far below the 22% GDP contribution of the sector in developed countries.
The Nigerian government derives about 80% of its revenue and 90% of its export earnings from
crude oil, Richardson (as cited in Dantata, 2008). Another researcher Mbamali (as cited in UK
Essay, 2018) attributed the low contribution of the construction industry to relatively lower use
of mechanization within the industry in Nigeria and the high dependency of the Nigerian
economy on the oil sector.
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Table 1: Nigeria Construction Industry Contribution to Real Sector GDP
Construction Industry GDP
Total GDP (Naira % GDP Contribution of
Year Contribution (Naira
Million) Construction Industry
Million)
2008 975,781.20 39,157,884.39 2.49%
2009 1,297,789.00 44,285,560.50 2.93%
2010 1,570,973.47 54,612,264.18 2.88%
2011 1,905,574.90 62,980,397.22 3.03%
2012 2,188,718.59 71,713,935.06 3.05%
2013 2,676,284.47 80,092,563.38 3.34%
2014 3,188,822.90 89,043,615.26 3.58%
2015 3,472,255.13 94,144,960.45 3.69%
2016 3,606,560.18 101,489,492.20 3.55%
2017 4,281,776.11 113,719,048.23 3.77%
Source: Central Bank of Nigeria Database and Author’s Computation, 2018
Also, a study by Isa, Jimoh and Achuenu (2013, p.2) posited that: “Since Independence, the
Nigerian economy remains weak, narrow and externally oriented with primary production
activities of agriculture and mining (especially crude oil and gas) accounting for about 65% of
the GDP and over 80% of government revenues. These activities account for over 90% of
foreign exchange (forex) earnings and 75% of employment (NBS, 2011). In contrast, secondary
activities comprising manufacturing and building and construction, which traditionally have
greater potential for employment generation, broadening the productive base of the economy and
generating sustainable forex earnings and government revenues account for a mere 4.14% and
2.0% of gross output, respectively”.
2.3.2 Major Loopholes in Nigerian Construction Industry
Even though the apparent human and material resource gap needed for successful completion of
complex projects between indigenous firms and their foreign counterparts are now closer
13
compared to the pre-independence era due to improvement in the training institutions,
engagement of expatriates, collaborations between indigenous and foreign entrepreneurs,
improved policies etc as posited by Mbamali and Okotie (as cited in Isa, Jimoh & Achuenu,
2013), there are still major loopholes in the industry.
The industry which has been in existence for decades only have four listed companies as at year
2018. This is nothing less than an insult to the industry and the country as a whole. The
construction industry in Nigeria is heavily dependent on government expenditure. The private
sector participation pales to insignificance when compared with the government spending on the
sector.
Other peculiar problems common to sub-Saharan African countries, such as project financing,
shortage of technical expertise, corruption and poor implementation of policies and programmes
are challenges hindering development and growth of the sector and hence the contribution to the
sustainable development (Isa, Jimoh & Achuenu, 2013).
Financial prudence is a major problem bedeviling construction companies in Nigeria, most of the
companies don’t have standard accounting systems and yet they are being engaged in multi
billion naira projects. Also there is only a very limited number of empirical research in the
financial aspect of the industry. All the industry direct stakeholders are mainly concerned in
only the technical aspect of the sector, little attention is given to the financial aspect of the sector.
14
Furthermore, the importance of the construction industry cannot be overemphasized. This is
evident from the fact that most countries put over 55% of their gross domestic investment into
the creation of physical facilities, including infrastructure that is necessary for development
(Olowo-Okere & Olaloku as cited in Isa, Jimoh & Achuenu, 2013). In Nigeria however, some of
the major problems bedevilling development of the industry are: poor policy implementation
and; high cost of capital, which is common to all businesses in Nigeria.
Cost of capital plays a critical role in every profit making enterprise. Scholars, practitioners and
governments all over the world have tried to establish the full picture about cost of capital
because consideration of the cost of capital leads to better understanding of how and where can
businesses make profit. As state by Rad (2014, p.70):
The existence of all businesses is tied to calculation of cost of capital. The financial
sector of each business consists of two subsections, debt and equity. So in calculating
cost of capital two elements should be mentioned, cost of debt and cost of equity. Cost of
debt consists of interest that should be paid by businesses to borrow money, and cost of
equity consists of the amount of money that should be paid to investors.
It is obvious that construction industry’s role in economic growth is a significant one in both
developing and developed countries. Construction sector in Nigeria plays an increasingly
important role in the nation’s drive for diversified economy that can lead to true sustainable
development. Apart from the industry’s social-economic potentials, its employment generation
capabilities and the multi-sectoral dimensions made it an area that a nation with vision can look
into for sustainable development (Isa, Jimoh & Achuenu, 2013).
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2.3.3 Cost of Capital for Construction Companies in Nigeria
Rad (2014) opined that debt and equity are the only source of firms’ financing. Meaning that the
cost of obtaining fund/capital is only on the debt and equity component of the firms’ capital.
Cost of Debt is referred to as Interest Expenses by Crowley (2007). He defined interest as money
borrower pays for the use of money they borrow from a lender/financial institutions or fee paid
on borrowed assets (Mwangi, 2014).
Cost of Equity in the other hand is one of the most important aspects that you need to look at
before you think of investing in the company’s shares. From the companies’ perspective, it is the
return (rate of return) a company pays to its equity investors. Rad (2014) buttressed on these
believe that it is the amount of money that should be paid to investors.
Both cost of debt and cost of equity greatly affect the financial performance of construction
companies in Nigeria and beyond. Here financial performance means the profitability or the rate
of return the company realized within a certain period form its investments and assets in general.
The key purpose of this research is to examine the relationship and effect of cost of capital on
financial performance of construction companies in Nigeria with a view to providing an insight
on how to mitigate or improve such effect, as the result may be. The research highlights an
overview of the construction industry in Nigeria and the key problems bedevilling the industry’s
development. Theoretical reviews and empirical studies on the cost of capital and its effect on
16
businesses were critically reviewed and analysed. A scientific model was developed in order to
test the theories and hypotheses developed for the research.
2.3.4 Theories
Cost of Capital is simply an anecdote of costs implication of Capital Structure (Debt and Equity
Mix). Hence an optimal capital structure is an optimal cost of capital. The two terms are
inseparable in business realm and always have the same objective. A mix of capital structure that
minimize cost (debt and equity returns) and maximize company value is the target of every
business. Therefore the relevant theories focus on relationship between capital structure and cost
of capital and how they impact on the value of company. The firms’ value is proxied by return
on asset and return on equity for this research. The below theories try to underline the correlation
between cost of capital and firms’ value/performance.
i. Traditional Approach
The traditional approach believes that optimal capital structure is attainable, and it can be
achieved through the management decision with regards the proportion of debt and equity. The
optimal capital structure according to this theory is that which minimizes the company’s cost of
capital and maximizes the total value of the firm. This theory shows that high cost of capital can
affect the value of a firm; therefore, effort should be made to reduce the cost of capital (Ibrahim
and Ibrahim, 2015).
17
Therefore, this theory suggest a significant and negative relationship between cost of capital and
firm value. It posited that as the cost of capital increases the firm value decreases, whereas as the
cost of capital decreases, the firm value increases.
ii. Signalling Effect Theory
In his seminal 1973 article, Michael Spence proposed that two parties could get around the
problem of asymmetric information by having one party send a signal that would reveal some
piece of relevant information to the other party. This theory is based on the premise that the
managers and shareholders of a firm do not have the same access to information of the firm.
There is certain information (inside information) that is available only to the insiders (the
managers), which is not available to the shareholders. Hence, there is asymmetric information
between the managers and the shareholders. As a result, when the capital structure of a firm
changes (through issuance of more debt and/or repurchase of outstanding stocks), it can convey
information about the firm to the shareholders that can cause the value of the firm to change. In
other words, signalling has occurred (Kanini, 2014, p.17).
According to Markopoulou & Papadopoulos (2009), signalling theory was developed by Ross in
1977 and other writers based upon the problems of asymmetrical information between
shareholders and managers. Ross claims that when a firm issues new debt, it sends a signal to the
shareholders and potential investors that the firm’s future prospective is improving. The reason
for this is because increased debt usage means higher cash flow constraint and financial distress
cost, and the managers will only issue more debt if they are sure that the firm will do well
enough to make those payments.
18
However, issuance of new shares according to some studies would lead to a negative share price
response and repurchase of outstanding shares will lead to a positive stock price response. The
reason for that is because current shareholders and potential investors view the issuance of new
common stocks as a way for the managers to lower their shares of the firm’s “bad fortune”. And
they view the repurchase of outstanding common stocks as a way for the managers to enjoy a
bigger share of the firm’s “good fortune (Kanini, 2014).
iii. Net Operating Income (NOI) Theory
This approach was put forth by Durand in 1952. The Net Operating Income approach is of the
view that weighted average cost of capital (WACC) and the total value of the company remain
the same regardless of the level of financial leverage. This view implies that capital structure,
cost of capital do not affect the value of a firm (Ibrahim & Ibrahim, 2015). This view is in tune
with Modigliani and Miller (MM) opinion. MM hypothesize that the value of the firm is
independent of its capital structure and is determined solely by its investment decisions.
NOI approach suggests that change in debt of a company or the change in financial leverage
(debt/equity ratio) fails to affect the total value of the company. As per this approach, the WACC
and the total value of a company are independent of the capital structure decision or financial
leverage of a company. Therefore, change in debt to equity ratio cannot make any change in the
value of the firm. It further says that with the increase in the debt component of a company, the
company is faced with higher risk. To compensate that, the equity shareholders expect more
19
returns. Thus, with an increase in financial leverage, the cost of equity increases which negates
the impact of the debt (eFinance Management (2018).
iv. Trade-Off Theory
This theory suggest an optimal capital structure that mix of equity and debt where present value
of tax advantages equals to the present value of costs related to debt. “Its main advantage is the
fact that it suggests mediocre leverage and it is easy to understand. Its disadvantage is the fact
that it is a general descriptive theory that does not explain which exactly is the right level of
leverage” (Markopoulou & Papadopoulos, 2009).
This theory refers to the idea that a company chooses how much debt finance and how much
equity finance to use by balancing the costs and benefits. The classical version of the hypothesis
goes back to Kraus and Litzenberger who considered a balance between the dead-weight costs of
bankruptcy and the tax saving benefits of debt. Often agency costs are also included in the
balance. The static trade-off theory explains that a firm’s decision for getting to their optimal
capital structure is related to the trade-off between the tax advantage of debt and several
leverage-related costs (Bradley, Jarrell, & Kim (as cited in Kanini, 2014).
The theory among other things predicts a positive relationship between tax and leverage. The
trade-off theory has contributed a lot in finance. It yields an intuitively pleasing interior optimum
for firms and gives a rationale for cross-sectional variation in corporate debt ratios i.e. firms with
different types of assets will have different bankruptcy and agency costs and different optimal
debt ratios.
20
However, the theory has limitations i.e. debt ratios as produced by this theory are
significantly higher than observed. Secondly, in many industries, the most profitable
firms often have the lowest debt ratios, which is the opposite of what the trade-off theory
predicts (sunder & Myers, 1999). According to Myers (1984) the trade-off theory also
fails to predict the wide degree of cross-sectional and time variation of observed debt
rations (Kanini, 2014).
v. Pecking Order Theory
Myers & Majluf (1984) and Myers (1984) developed the pecking order hypothesis. The theory
posited that companies prefer to be funded through internal finances, than by debt, and finally by
raising equity. Two main approaches explain this theory (Halov & Heider, 2005). The first is the
transactional cost of external finances, which says that the type of funds that will be preferred
depends on costs of the issue. The second is based on asymmetric information theory which
states that debt is preferred to equity because taking a loan is positive sign for investors who are
not as well informed as the management (Markopoulou & Papadopoulos, 2009).
This position is also reported by Kanini (2014, p.18):
Myers (1984) claims that there is a pecking order to a firm’s use of capital. The theory
implies that firms prefer internal equity financing (using retained earnings) compared to
external equity financing (issuing new common stocks). The reason for this is because it
is a lot cheaper using retained earnings and it does not have to disclose a lot of
information about the firm (which it must provide in the prospectus of new bonds and
common stocks). And if a firm does need to use external financing, it will issue debt first
21
before it issues new common stock. This is because the firm is sending a signal to current
shareholders and prospective investors that its current and future prospects are not that
great when it issues new common stocks.
Sequel to review of the above theories, this research would be underpinned on the Net Operating
Income (NOI) theory, which is also in line with the research null hypotheses. Hence the study
would amongst other things seek to test the validity of the theory in relation to financial
performance of listed construction firms in Nigeria.
2.4 Empirical Review
Modigliani & Miller study (1958), was the first study addressing the relationship between
financial leverage (capital structure) with both capital cost and firm value. Its aim was to prove
that market value of the firm is independent from its capital structure, regardless of fluctuations
in financial leverage. The study was conducted in (1958) on a number of American firms using
static/partial equilibrium analysis, and found an evidence that negated the effect of capital
structure on capital cost, and as such, it doesn't affect the firm value, as well as, investment
decisions but not financing decision, that affect the firm values.
In 2001, Richardson and Welker empirically test the relation between financial and social
disclosure and the cost of equity capital for a sample of Canadian firms for the year 1990 to
1992. They found that the quantity and quality of financial disclosure is negatively related to the
cost of equity capital for firms with low analyst following. But there is a significant positive
22
relation between social disclosures and the cost of equity capital. This positive relationship is
mitigated among firms with better financial performance.
Khadka (2006) conducted a study in the Napalese capital market to determine whether the firms'
overall cost of capital and cost of equity decline with the increasing use of leverage for the
period 1990-2005. The results showed a negative but insignificant beta value of the relationship
between leverage and the overall cost of capital. This contradicts with the traditional approach of
the capital structure theories. It is further concluded that the cost of capital declines not only with
leverage because of the tax deductibility feature of interest charge. The relationship between the
cost of equity and leverage is also strongly negative. Besides leverage, the size, and D-P Ratio
are other important variables that affect the cost of capital in Nepalese context.
Pagano (2007) develops empirical estimates of the average cost of capital for 58 U.S. industries
during 1990-2004. A simple, parsimonious theoretical relation between an industry’s weighted
average cost of capital (WACC) and the industry’s economic profit is used to obtain empirical
estimates of the WACC for these 58 industries. Overall, the results suggest that the technique he
employed can be a more expedient, descriptive, and less-subjective method of deriving estimates
of an industry (or firm’s) weighted average cost of capital and economic profit. This new method
can be used to complement or supplement the textbook approach to estimating the cost of capital.
Mohammad and Qamar (2011) studied the relationship between corporate performance and cost
of equity capital. Corporate performance was taken as an independent variable and cost of equity
capital was taken as dependent variable while return on asset was taken as proxy to measure the
23
corporate performance. Panel regression and Hausman test were applied to check the
effectiveness of random and fixed effect. The finding shows insignificant relationship between
corporate performance and cost of equity capital which is consistent with M&M study (Ibrahim
& Ibrahim, 2015).
Embong, Mohd-Saleh and Hassan (2012) examine the relationship between disclosure and cost
of equity capital for 460 larger firms listed under the Main Board of Bursa Malaysia from 2004
to 2006. Multiple regression and correlation analysis tests were performed for the study. The
result shows that there is a significant negative relationship between disclosure and cost of equity
capital for large firms and not significant for small firms. They recommend that managers should
strategize the firm’s disclosure policy by taking into consideration it reduces cost of equity for
larger firms.
Hussain, Ali and Islam (2012) study the impact of WACC on Corporate Profitability of Cement
Industry of Pakistan between 2003 and 2008. The results have quantified the proportionate
impact of Cost of Capital on Return on Equity ROE in the Cement industry under the assumption
that scale of operation and managerial efficiency in all the firms operating in this industry
remains the same. The study has highlighted the cost of capital as the major determinant of the
profitability of firms in cement industry. The study, however, does not recommend the inclusion
of other industries as debt to equity ratio is different for almost every industry, and hence
accurate results may not be realized if further industries are included. The forecasting validity of
the model can be improved if some relevant quantitative other factors affecting corporate
24
profitability such as investments, inflation, foreign exchange rate and qualitative factors such as
management style, effect of investment decisions or the interest of shareholders are incorporated.
Mohamad and Saad (2012) examine the effects of cost of capital using the weighted-average cost
of capital (WACC) approach with firm value and profitability from the viewpoints of listed
companies in Bursa Malaysia. The study employed two model specifications in order to test the
postulated hypotheses, using cost of capital measure of WACC along with other independent
variables for 415 listed companies for the period of 2005 until 2010. On the basis of findings for
the research, it concluded that there are significant relations between cost of capital with firm’s
value and profitability for listed companies in Malaysia. The result of the study shows significant
relationships exist between cost of capital with firm value and profitability.
Pouraghajan, et. al. (2012) researched and investigated the effect of capital cost on the financial
performance of companies listed on the Tehran Stock Exchange. A sample of 350 firm-years
among companies listed in Tehran Stock Exchange during the years 2006 to 2010 were studied.
In the study, they used returns on asset (ROA) ratio and return on equity (ROE) as the
accounting criteria of corporate performance evaluation. The results indicate that there is a
significant and positive relationship between the weighted average cost of capital (WACC) and
criteria of corporate performance evaluation (ROA and ROE). Also, the relationship between the
control variables of firm size and the profitability ratios was positive and significant.
Sharma (2012) conducted a study to measure impact of cost of capital on various financial
factors i.e. profitability, growth rate, liquidity and dividend policy for Bharti Airtel Limited in
25
India between 2005 and 2010. The statistical like correlation and regression method have been
applied. The study has analysed there is significant relationship between cost of capital and the
efficiency, profitability, dividend policy, growing capacity relationship of Telecommunication
industry in India.
Al-Tamimi and Obeidat (2013) studied the impact of cost of capital, financial leverage and the
growth rate of dividends on rate of return on investment for the Amman Stock Exchange
between 1997 to 2009. The study used multiple linear regression analysis. The model included a
number of independent variables which are the cost of capital, financial leverage, and growth
rate of dividends. The results of the study showed that there is a positive and statistically
significant effect for growth rate of dividends on rate of return on investment. On the other hand,
the study showed no effect with statistical significance for each of the cost of capital and
financial leverage on rate of return on investment. This support the Modigliani & Miller study
(1958), showing insignificant relationship between cost of capital, financial leverage and rate of
return on investment.
Arowoshegbe & Emeni (2014) study the relationship between shareholders’ wealth and debt-
equity mix of NSE non-financial firms’ data from 1997 to 2011. Two measures of shareholders’
wealth: Return on Equity (ROE) and Earnings per Share (EPS) were taken as the dependent
variables, and the principal explanatory variable for each of the models was Debt Ratio (DR).
The results reveal that there is a significant negative relationship between shareholders’ wealth
and debt-equity mix. It was recommended that adequate fiscal policies, relevant capital market
institutional and legal framework should be put in place.
26
Kanini (2014) investigates the impact of cost of capital on the investment decision of non-
financial firms listed at the Nairobi Securities Exchange between 2008 and 2012. Multivariate
regression analysis and t-test was conducted for the analysis. The result revealed that investment
decision had influenced positively on the company value, which meant the investors assumed the
management had performed well in searching and investing the obtained capital from debt. The
research findings indicated an insignificant positive relationship between cost of capital and
investment.
Rad (2014) studied The Relationship between Corporate Governance Practices and Cost of
Capital in Large Listed Companies of New Zealand and Singapore between 2006-2010. Pooled
Data obtained from secondary source were employed. The findings indicate that there is negative
relationship between corporate governance and cost of capital and this means that complying
corporate governance guidelines help companies to control their cost of capital.
Abdul Sattar (2015), conducted a research to bridge the gap by empirical evidence about cost of
capital (WACC) and its effect to the performance of Karachi Stock Exchange (KSE) 100 Index
listed companies from the perspective of Firm Value and profitability. He found that there is a
significant impact of Weighted Average Cost of Capital on Firm Value and Return on Asset.
Also found a positive effect between Firm Size and Return on Assets whenever any change
occurs in Independent Variables except one variable i.e. WACC. WACC gives negative impact
on Firm Value and Return on Assets. Any change in WACC can affect the return on assets of the
firm. Another evidence found that there is no effect of Total Debt Ratio on Return on Asset.
27
Agustini (2015) conducted a research to examine the role of IFRS adoption in the relation
between firm size and rate of inflation on the cost of capital. Using a sample of 176 firms from
31 countries across Europe, America and Asia Pacific listed in NYSE. The research found that
IFRS adoption has no impact on reducing the cost of capital. It further shows that the listed firms
in NYSE already made financial statement with complete information in a good quality standard.
Ibrahim and Ibrahim (2015) examined the effect of SMEs cost of capital on their financial
performance using a sample of five SMEs from the total population of eleven SMEs listed on the
Alternative Securities Market (ASEM) of the Nigerian Stock Exchange Market during the five
year period, 2008 – 2012. Data for the selected SMEs were generated and analyzed using linear
regression technique. The result shows that SMEs cost of capital have insignificant effect on
their financial performance (return on asset, ROA). They recommended that SMEs should utilize
the opportunity created by ASEM to access long term financing as the costs have no effect on
their performance.
Jeon and Kim (2015) study the effect of firms Investor Relations on Cost of Debt Capital of
listed companies from 2007-2011. Result reveal that firms with high cost of debt capital showed
significantly low holding frequency and investor relations. Therefore, it is concluded that firms
IR decrease cost of debt capital. Also due to influence analysis of investor relations on cost of
debt capital, whether firms held investor relations or not has a positive relevance, insignificant
with cost of debt capital. Lastly, as a result of influence analysis of investor relations on cost of
debt capital depending on firm size and foreign ownership that reflect on firm characteristics,
28
firm IR whose size is big and foreign ownership are high shows a negative relevance, significant
with cost of debt capital.
Valentine (2015) examined how interest rate fluctuation affect commercial banks fixed fund
deposits in Nigeria. He stated that both deposit and lending rates were greatly influenced by the
Central Bank of Nigeria (CBN) decision on interest rate. Therefore, commercial bank effort to
attract deposits via manipulation of her rates was greatly limited, otherwise the banks will be
giving out more than it earned. The researcher employed ordinary least square technique, using,
multiple linear regression, unrestricted vector auto-regression, correlation matrix test, granger
causality and impulse response graph in the analysis. He concluded that commercial bank’s
interest rates affected commercial bank’s fixed fund deposit significantly while policy-controlled
interest rate did not significantly transmit through the commercial bank’s interest rates to affect
fixed fund deposit.
Raja and Dave (2015) analyse the effect of capital structure on profitability of BSE Companies
for the period 2007-2012. Profitability was proxied by ROE while short-term debt, long-term
debt and total liability are considered as the independent variables. OLS Regression was used for
analysis. The findings reveal that financing a firm through debt negatively affects its
profitability. They recommend that the companies should always adopt right combination of long
term and short term debt.
Tsai and Chen (2015) conducted a research to examine how equity capital cost affects return
performance and safety of a bank and how this effect varies across a financial crisis comparing to
29
a normal time. They derive two main results. First, an increase in the bank’s equity capital cost
from an increase of the interest rate of the Federal funds results in a reduced loan risk-taking at
an increased optimal bank interest margin, implying better bank performance. Second, by
ignoring the dislike, we find that the better performance is reinforced during a financial crisis but
is reduced during a normal time.
Wan (2015) examines the effects of corporate governance mechanisms on the cost of capital of
Canadian firms listed on the Toronto Stock Exchange after the 2008 financial crisis. Insider
ownership, board size, and CEO duality are found to be negatively related to the cost of capital.
In contrast, institutional ownership is shown to be positively related to the cost of capital. In
Canadian mining firms, which have a higher cost of capital than firms in other industries, insider
ownership is negatively associated with the cost of capital. In the transportation industry, both
institutional ownership and insider ownership are positively related to the cost of capital.
A research by Abubakar, Shaba and Yaaba (2016) examined the impact of capital structure
(owners’ funds and borrowed funds) on bank profitability in Nigeria. Applying autoregressive
distributed lag model on a sample of 13 DMBs from 2005 through 2014, the study found that
about 83 per cent of total assets employed by the DMBs are not financed by owners, confirming
the hypothesis that banks are highly levered institutions. The results further found evidence of a
positive and significant influence of both owners’ and borrowed funds on profitability. However,
borrowed funds was found to be more prevalent in enhancing the performance of DMBs during
the study period. Since debt is more critical in boosting profitability of banks in Nigeria, they
recommend DMBs should employ more debt than equity in financing real investment with
30
positive net present values. The DMBs should also incentivize lenders and depositors so as to
enhance easy access to funds other than shareholders’.
Alrjoub and Ahmad (2017) examine the moderating effect of cost of capital on the relationship
between inventory types and firm performance of 48 manufacturing firms in Jordan for the
period 2010–2016. Pearson correlation and panel Generalized Method of Moments (GMM)
estimation were used. Findings reveal that cost of capital moderates the relationship between
inventory management and firm performance. They recommend that firms should consider cost
of capital when making decision on inventory types and align their inventory control to fit in to
the changes in their business environment.
Ivasu and Barbuta-Misu (2017) study the relationship between cost of capital and financial
performance of Engie Transnational Group. The data used were extracted from the Amadeus and
Bloomberg databases for the period 2010-2015. Financial performance was analysed both by
creating and proposing an aggregate index, as well as based on the Z Conan & Holder score. The
company's financial structure was analysed on the basis of the total leverage ratio and for the
total cost of capital, the weighted average capital cost (WACC) formula was used. The results
show that capital structure is predominantly indebted, and the maximum financial performance is
obtained when the financial structure is minimal and the WACC is maximum.
Lucky, 2017 examine the effect of short term, medium term and long term cost of capital on
earnings per share. Cross sectional data was sourced from financial statement of twenty quoted
firms from 2011-2016 in Nigeria. Earnings per share was proxy for dependent variable while
31
cost of trade credit, cost of short term bank loans, cost of commercial paper, cost of banker
acceptance, cost of line of credit, cost of revolving credit, cost of hire purchase, cost of operating
lease, cost of debt, cost of preference share and cost of equity are proxy for independent
variables. The study use fixed and random effect models. Findings reveals that cost of short term
and cost of long term debts have significant relationship with corporate earning while cost of
medium term have no significant effect on corporate earnings. It recommends the need for
corporate strategies that will reduce cost of capital.
32
Name of Topic/Objective,
Data and Conclusion/
Author(s) & Population and Variables of Study Findings
Methodology Recommendation
Year Study Period.
Modigliani and The Cost of Capital, DV (Capital Cost Secondary Data.
Capital structure have no Concluded that cost of
Miller, 1958 Corporation Finance and Firm Value). Static and Partial
effect on capital cost, and as capital does not affect firm
and the Theory of IV (Capital Equilibrium
such, it doesn't affect the value.
Investment. Structure). Analysis firm value, as well as,
investment decisions but not
financing decision, that
affect the firm values
Richardson and Social Disclosure, DV (Cost of Equity Secondary Data. The quantity and quality of The effect of social
Welker, 2001 Financial Disclosure Capital). Multiple financial disclosure is disclosure on the cost of
and Cost of Equity IV (Financial and Regression and negatively related to the cost equity capital does not
Capital. Social Disclosure, Pearson of equity capital for firms imply that social disclosure
Size, Leverage, Correlation. with low analyst. But there is has an overall negative
Analysts). a significant positive relation effect on the firm.
between social disclosures
and the cost of equity capital.
Khadka, 2006 To examine the effect DV (Cost of Secondary Data. Finding showed a negative Leverage may not be
of Capital Structure Capital). Simple but insignificant beta value regarded as contributing
on Cost of Capital. 15 IV (Leverage, Size, Regression. of the relationship between variable to the cost of
Nepalese Listed Growth, Dividend leverage and the overall cost capital function for
Companies from Payout Ratio and of capital. The relationship Nepalese firms.
1990-2005. Liquidity). between the cost of equity Also that the cost of capital
and leverage is also strongly declines not only with
negative. leverage because of the tax
deductibility feature of
interest charge.
Pagano, 2007. The Relation between DV (Profit After Secondary Data. Overall, the results suggest The method can be used to
Cost of Capital and Tax). Multiple Linear that the technique he complement or supplement
Economic Profit IV: WACC, Regression employed can be a more the textbook approach to
using 58 US Economic Value Analysis. expedient, descriptive, and estimating the cost of
Industries between Added and Total less-subjective method of capital.
1990-2004. Capital. deriving estimates of an
industry (or firm’s) weighted
33
Year Study Period.
average cost of capital and
economic profit.
Mohammad and The relationship DV (ROA). Secondary Data. Insignificant relationship Cost of equity does not
Qamar. 2011. between Corporate IV (Cost of Equity). Panel between corporate have effect on corporate
Performance and Cost Regression and performance and cost of performance.
of Equity Capital. Hausman Test. equity capital which is
consistent with M&M study
Embong, Mohd- To examine the
DV (Cost of Secondary data. Result shows that there is a The managers of firms
Saleh & Hassan, relationship between Equity). Multiple significant negative could strategize the firm’s
2012. disclosure and cost ofIV (Disclosure). regression relationship between disclosure policy by taking
equity capital for 460 analysis. disclosure and cost of equity into consideration that the
larger firms listed capital for large firms and benefit of disclosure in
under the Main Board not significant for small reducing the cost of equity
of Bursa Malaysia firms. may depend on the firm
from 2004 to 2006. size.
Hussain, Ali and Impact of WACC on DV (ROE). Secondary panel The study has highlighted the Validity of the model can
Islam, 2012. Corporate IV (WACC). data. cost of capital as the major be improved if other
Profitability for Simple linear determinant of the variables affecting
Cement Industry of regression. profitability of firms in corporate profitability such
Pakistan from 2003 to cement industry. as investments, inflation,
2008. qualitative factors such as
management style,
interest of shareholders etc
are incorporated.
Mohamad and Cost of Capital – The DV (ROA, Firm Secondary Data. The result of the study shows It was recommended that
Saad, 2012. Effect to Firms Value Value - Tobin Q). Multiple significant relationships exist the study is further
and Profitability IV (WACC, Regression. between cost of capital with improved with more
Performance in 415 Distress Risk, Total firm value and profitability. sample size, different
listed Companies in Debt Ratio, Total variables which could
Malaysia 2005-2010. Asset and GDP). provide a strong
relationship between the
variables and help to
uncover the better firm’s
34
Year Study Period.
value and return
performance.
Pouraghajan, et. Relationship between DV (ROA and Time series and There is a significant and As WACC and Firm Size
al., 2012. Cost of Capital and ROE). cross sectional positive relationship between increases, ROA and ROE
Accounting Criteria IV (WACC and data. WACC and performance increases due to their
of Corporate Firm Size). Hausman Test, (ROA and ROE). positive and significant
Performance F-Limer Test Also, the relationship relationship.
Evaluation: Evidence and Multivariate between firm size and ROA,
from Tehran Stock regression model ROE is positive and
Exchange 2006-2010. analysis. significant.
Sharma, 2012. Cost of Capital and DV (Profitability, Secondary Data. The study has analyzed there The overall cost of capital
Profitability (A Case Growth Rate, Ratio Analysis is significant relationship is affected by the designing
Study of Bharti Airtel Liquidity and and Regression between cost of capital and of capital structure of
Limited, India) 2005- Dividend Policy). Analysis. the efficiency, profitability, Indian industries.
2010. IV (Cost of Capital). dividend policy, growing Therefore, maintenance of
capacity relationship of optimum level of capital
Telecommunication industry structure irrespective of
in India. nature of industries is
mandatory for a firm.
Al-Tamimi and Impact of cost of DV (Return on Secondary Data. Cost of Capital has no Study recommends further
Obeidat, 2013. capital, financial Investment ROI). Multiple Linear significant effect on ROI. researches to include other
leverage, and the IV (WACC, Regression Financial leverage has no sectors as well as
Growth Rate of Financial Leverage Analysis. significant effect on ROI. increasing the retained
Dividends on Rate of and Distribution Distribution Growth has earnings in these
return on investment: Growth). positive and significant companies for its positive
An Empirical study of effect on ROI. effect on ROI.
Amman stock
Exchange 1997-2009.
Arowoshegbe Relationship between DV (ROE, EPS). Secondary data. The results reveal that there It was recommended that
and Emeni , Shareholders’ wealth IV (Debt Ratio, Fixed Effect is a significant negative adequate fiscal policies,
2014 and Debt-Equity mix Total Asset Model relationship between relevant capital market
35
Year Study Period.
of NSE Non-financial Turnover, Current Regression. shareholders’ wealth and institutional and legal
Firms, 1997-2011 Ratio, Age, Size, debt-equity mix. framework should be put in
Capital Intensity). place.
Kanini, 2014 Relationship between DV (Investment). Secondary Data. The research findings This study thus
Cost of Capital and IV (Cost of Capital, Multivariate indicated an insignificant recommends need for more
Investment Decisions Debt Ratio). Regression. positive relationship between emphasis on cost of capital
of Listed Firms in cost of capital and as a major input in
Nairobi Stock investment. investment decisions so as
Exchange, 2008- to maximize on
2012. shareholders’ value.
Rad, 2014. The Relationship DV (WACC). Pooled The findings indicate that Companies should be able
Between Corporate IV (Total Asset, secondary data. there is negative relationship to foresee the effects of
Governance Practices Leverage, Board OLS and GLS between corporate their decisions on cost of
And Cost Of Capital Size, Insider Share, Regression governance and cost of capital when they are
In Large Listed Top Shareholders, Analysis. capital. modifying or changing
Companies Of New CEO Tenure, corporate governance
Zealand And Duality of characteristics.
Singapore, 2006- Directors, GDP).
2010.
Abdul-Sattar, Cost of Capital – The DV (ROA, Tobin Secondary Data. There is a significant impactCompanies should focus on
2015 Effect to the Firm Q). Regression of WACC on ROA and ROA Firm Value and percentage
Value and IV (WACC, Total Analysis (Panel is depended on WACC and of WACC.
Profitability; Debt Ration, Size, Least Square). GDP. Companies should
Empirical Evidences GDP. However, Total Debt Ratio maintain cost of capital and
in Case of Personal and Total Asset are not increase the size of the
Goods (Textile) correlated with ROA and firm.
Sector of KSE 100 GDP. They should also should
Index, 2004-2013. Firm value and WACC are focus on increasing the
correlated. value of the firm and its
share and give reasonable
dividend to shareholders.
Ibrahim and The Effect of listed DV (ROA). Secondary Panel SMEs’ cost of capital have Recommended that SMEs
Ibrahim, 2015. SMEs’ Cost of IV (Cost of Equity). Data. no significant effect on their should utilize the
36
Year Study Period.
Capital on Their Linear ROA. opportunity created by
Financial Regression NSE through ASEM to
Performance in Analysis. access long term financing
Nigeria 2008-2012. as the costs have no effect
on their performance
Agustini, 2015 Impact of IFRS DV (Cost of Secondary data. The research found that IFRS Concludes that larger firms
Adoption on Cost of Capital). FEM adoption has no impact on have lower cost of capital.
Capital for 176 NYSE IV (IFRS, Size, Regression. reducing the cost of capital.
listed Firms, 2007- Inflation).
2011.
Jeon and Kim, Study the effect of DV (Cost of Debt Secondary data. Result reveal that firms with It is concluded that firms
2015. firms Investor Capital). Regression high cost of debt capital IR decrease cost of debt
Relations on Cost of IV (Investor analysis. showed significantly low capital.
Debt Capital of listed Relations). holding frequency and
companies from investor relations.
2007-2011.2007-
2011.
Raja and Dave, Capital Structure and DV (ROE). Secondary data. The findings reveal that Companies should always
2015 Profitability of BSE IV (short-term debt, OLS Regression. financing a company through adopt right combination of
Companies, 2007- long-term debt and debt negatively affects its long term and short term
2012. total liability). profitability. debt.
Tsai and Chen, To examine how DV (Return Differential An increase in the bank’s Financial crises and the
2015 equity capital cost Performance). Equation. equity capital cost from an dislike preference as such
affects return IV (Equity Capital increase of the interest rate contribute a relatively low
performance and Cost). of the Federal funds results return and the stability of
safety of a bank. in a reduced loan risk-taking banking activities.
at an increased optimal bank
interest margin.
Also, by ignoring the dislike,
we find that the better
performance is reinforced
during a financial crisis but
is reduced during a normal
37
Year Study Period.
time.
Wan, 2015 Corporate DV (WACC). Secondary data. Found that Insider Canadian mining firms,
Governance and Cost IV (Size, Capital OLS and FE ownership, board size, and have a higher cost of
of Capital for Expenditure to Regression. CEO duality are found to be capital than firms in other
Canadian Listed Asset Ratio, negatively related to the cost industries, and hence
Firms, 2010-2014. Leverage, Insider of capital. In contrast, insider ownership is
Ownership, Board institutional ownership is negatively associated with
Size, Independent shown to be positively the cost of capital. In the
Directors, Board related to the cost of capital. transportation industry,
Size, CEO Duality, both institutional
Institutional ownership and insider
Ownership). ownership are positively
related to the cost of
capital.
Alrjoub and To examine the DV (Finacial Secondary data. Findings reveal that cost of They recommend that firms
Ahmad, 2017 moderating effect of Performance). Regression capital moderates the should consider cost of
cost of capital on the IV (Inventories, analysis. relationship between capital when making
relationship between WACC, Size, inventory management and decision on inventory types
inventory types and Leverage). firm performance. and align their inventory
firm performance of control to fit in to the
48 manufacturing changes in their business
firms in Jordan for the environment.
period 2010–2016
Ivascu and Impact of Cost of DV (Quick Ratio, Secondary data. The results show that capital Based on the study, the
Barbuta-Misu, Capital on Financial Solvency Ratio, structure is predominantly theories regarding
2017 Performance: Case Financial indebted, and the maximum information asymmetry,
Study of ENGIE Independence, financial performance is pecking order and dynamic
Transnational Group, ROA, ROE, Total obtained when the financial trade-off of the financial
2010-2015. Asset). structure is minimal and the structure are confirmed.
IV (WACC). WACC is maximum.
Lucky, 2017. Cost of Capital and DV (Earnings Per Cross sectional Findings reveals that cost of Recommends the need for
Corporate Earning of Share). Data. short term capital and cost of corporate strategies that
Nigeria Quoted IV (Cost of Debt Pooled Ordinary long term capital have will reduce cost of capital.
38
Year Study Period.
Firms: A Multi- and Cost of Equity). Least Square significant relationship with
Dimensional Analysis Regression corporate earning while cost
of Quoted Firms in Model. of medium term have no
Nigeria 2011-2016. significant effect on
corporate earnings.
39
2.5 Gap in the Literature
Following an extensive review of numerous theoretical and empirical literatures, this study
attempts to add value on the research area of the effect of cost of capital on financial
performance of construction companies in Nigeria given that the area hasn’t been previously
studied extensively by scholars.
Also, even if we are to widen the scope by leaving the study population open to all sectors, all
the previous papers researched only focused on impact of either Cost of Debt alone, Cost of
Equity or use Weighted Average Cost of Capital (WACC) as a measure for firms Cost of
Capital. None of the previous studies take the cost of debt and cost of equity independently in a
model to measure the cost of capital. Hence, it is therefore evident to say that the research
population for the topic (i.e. Nigerian Listed Construction Companies) is a gap; the study period
(year 2008 to 2017) is also a gap and; the use of components of cost of capital (debt and equity)
independently is also a method not used before.
40
CHAPTER THREE
METHODOLOGY
3.1 Introduction
This chapter explains the strategy employed and adopted in carrying out the research work. It
discusses the research design, population of the study, and various methods used in the collection
of data for the research. The chapter detailed out the research model used, the method of analyses
for testing the hypotheses and the concepts adopted for measuring the variables.
3.2 Research Design
According to the Oxford Advanced Learners Dictionary, research is a systematic investigation
undertaken in order to discover new facts, and/or get additional information of a phenomenon.
Research design constitute blueprint for the collection, measurement and analysis of data. Mainly
the research problem determines the type of the research design to use. Kanini (2014) deduce
that research design refers to the structure of an enquiry and its function is to ensure that the
evidence obtained enables us to answer the initial question as unambiguously as possible.
The research design to be adopted for this study is descriptive research (also known as statistical
research) structured along historical and correlational designs. Descriptive research describes
phenomena as they exist. It is used to identify and obtain information on characteristic of a
particular issue like community, group or people. It is aimed at portraying accurately the
characteristics of a particular group or situation (Akhtar, 2016).
41
The historical data in descriptive research enabled researchers with a good understanding of
previous empirical evidence on the subject, from which the studies were able to build theoretical
bases. Also, correlational research design aided in describing, analysing and interpreting the data
collected from historical records of the study population.
3.3 Population
Target population for the study is the four (4) Construction Companies listed in the Nigerian
Stock Exchange (NSE) as at end of year the 2017 (Arbico Nigeria Plc, Julius Berger Nigeria Plc,
Roads Construction Nigeria Plc and UACN Property Development Company-UPDC). Due to the
few number of the population and giving the fact that secondary data was adopted, no sampling
technique was adopted. Hence the four listed companies form the entire sample. The research
period is constrained to the last ten years from 2008 to 2017.
3.4 Model Specification
Two equations were developed for the study, both of which are multiple linear regression models
aimed at explaining effect of cost of capital on financial performance. Equation-1 used ROA as a
measure of financial performance while Equation-2 used ROE. Our focus independent variables
are Cost of Debt and Cost of Equity. Control variables which also affect financial performance
were added to the model in order to control excessive variation in the results of the regression.
Al-Tamimi and Obeidat (2013) used Financial Leverage and Growth as control variables on a
model between cost of capital and return on investment. Our model will hence be as follows:
42
Financial Performance = α + Cost of Capital + e ----------------- Research Model
The model was expanded into 2 equations viz:
ROAit = α + β1CoDit + β1CoEit + β1SIZit + β1LEVit + β1GRWit + eit_______1

ROEit = α + β1CoDit + β1CoEit + β1SIZit + β1LEVit + β1GRWit + eit_______2
Where: ROA = Return of Asset
ROE = Return of Equity
α = Regression Constant
CoD = Cost of Debt
CoE = Cost of Debt
SIZ = Size (Control Variable)
LEV = Leverage (Control Variable)
GRW = Growth (Control Variable)
e = Error term
β1 = Coefficients of Regressors
i = firm
t = time period
3.5 Variables Definition and Measurement
Dependent Variable Measurement
a. Return on Asset (ROA): The component of the Dependent Variable is Return on Asset
ROA as computed from the company’s financial statements. ROA has been employed as
a proxy for measuring bank financial performance in several studies, Mohammad and
Qamar (2011); Siddik, Kabiraj and Joghee (2017); Rouf (2015); Hasan et. al. (2014);
Ramadan and Ramadan (2015). The ROA would be measured by dividing the net income
after tax by the book value of total asset, as adopted from (Pouraghajan, et. al., 2012).
Hence: ROA = Net Income / Total Assets
43
b. Return on Equity (ROE): ROE was also computed from the company’s financial
statements. Pouraghajan, et. al. (2012) calculated it from the proportion of net income
after tax on book value of total equity, hence:
ROE = Net Income/Total Equity
Independent Variable Measurement
a. Cost of Debt (CoD): CoD is simply the interest a company pays on its borrowings. As
examined by Lucky, 2017, cost of debt is computed by taking the rate on a risk free
bound whose duration matches the term structure of the corporate debt, then adding a
default premium. This default premium will rise as the amount of debt increases (since all
other things being equal, the risk rises as the cost of debt rises). Since in most cases debt
expense is a deductible, the cost of debt is computed as an after tax cost to make it
comparable with the cost of equity (earnings are taxed as well). Thus, for profitable
firms, debt is discounted by the tax rate. Hence, (Rf + credit risk rate)(1 –T)
Where T is the corporate tax rate and Rf is the risk rate.
The CoD would be expressed as a percentage rate of the total debt in this study given that
the dependent variable ROA is taken as a percentage rate. Hence, Cost of Debt is
calculated as:
CoD = After Tax Interest Expenses / Total Debt x 100%
NB: Effective tax rate = Income tax expense / Income before tax
After Tax Interest = Interest Expenses x (1 – Effective Tax Rate)
b. Cost of Equity (CoE): CoE can be measured in several ways. The two most popular
approaches in calculating CoE are the ex-post cost of equity capital and ex-ante cost of
44
equity capital. The least supported approach by literature is the ex-ante method which
consider Growth potential and cash flows as the concerning aspects (Hail, as cited in Rad,
2014). The ex-post approach is the most promoted method in literature. Capital Asset
Pricing Model (CAPM) and Fama and French Three Factor model are the predominant
methods in ex-post approach (Rad, 2014). Moreover, Botosan (as cited in Embong, 2012)
discussed methods such as average realized returns and the CAPM that could be used to
measure CoE. Given that all variables of the study are measured using ex-post approach,
this research will also be adopting ex-post method of calculating CoE. Ibrahim (2015) use
the following formula to calculate CoE, thus:
CoE = Dividend Paid / Market Value of Equity (excluding dividend)
Control Variables Measurement
a. Size: This is the overall total asset of a company within the focus period. Jeon & Kim
(2015) and Agustini (2015) measure Size using the formula:
Size = Log10(Total Asset)
b. Leverage: This reflects the degree to which debts are used by industrial companies in
financing their investments. Al-Tamimi & Obeidat (2013) and Jeon & Kim (2015)
calculated it by dividing total liabilities by total Assets. Hence:
Leverage = Total Debt / Total Asset
c. Growth: This is the rate of growth in asset compared to previous period asset. It reflects
the extent of progress and expansion of a firm (Al-Tamimi & Obeidat, 2013).
Growth = (current asset – previous asset) / previous asset
45
3.6 Sources and Methods of Data Collection
The research use secondary panel data. Data for calculating the Cost of Debt Capital, Cost of
Equity Capital, Leverage, Size and Growth were obtained from the financial statements of the
listed construction companies for the study period. Also, secondary data obtained from financial
statements of the listed construction companies was used to get the ROA and ROE for the study
(refer to Appendix I for raw data). The raw data were collated and arranged in Microsoft excel
for the purpose of analysis as stated in section 3.7. Data for some periods of the listed companies
could not be accessed, hence the data obtained were unbalanced. Available data gotten are:
Arbico (2012 to 2017), Julius Berger (2008 to 2017), Roads Construction (2008 to 2015), UPDC
(2008 to 2017).
All the above financial statements data were obtained from website of the companies and with
the help of a specialist research firm on financial and econometric data (MachameRatios).
Literature review data were obtained from the Nigerian Stock Exchange and sources such as
Central Bank of Nigeria, Journals and Internet. The researcher also apply his experience in the
construction industry and field survey to get understanding and insight of the subject topic.
3.7 Data Analysis Techniques
Statistical analysis was used for the research. Both descriptive and regression analysis were
utilized in the study. Descriptive statistics was computed using Microsoft Excel which amongst
other things help show the pattern, distribution, deviation and nature of the data.
46
For the regression analysis, Ordinary Least Square (OLS) Regression using STATA Software
Package was used to analyse the data and testing the hypotheses. The effectiveness of the
Ordinary Least Square (OLS) regression against Random Effect Model (REM) would be
compared in order to check the significance of panel effect and subsequently adopt the best
suited model.
3.8 Diagnostic Tests
There are some assumptions underpinning multiple regression. If these assumptions are not met,
you cannot reliably analyse your data using multiple regression because you will not get a valid
result. As noted by Osbourne & Waters (2002), most statistical tests rely upon certain
assumptions about the variables in the analysis, and when these assumptions are not met the
results may not be trustworthy, resulting in a Type-I or Type-II error, or over or under-estimation
of significance or effect size.
Diagnostic tests would be carried out to ensure that the data fits the basic assumption of the
multiple linear regression model in order to ascertain the reliability and validity of the result, the
following tests are to be carried out:
3.8.1 Linearity Test
As noted by Darlington (as cited in Ballance, n.d.), linearity defines the dependent variable as a
linear function of the independent variables. Some researchers argue that this assumption is the
most important, as it directly relates to the bias of the results of the whole analysis. If linearity is
47
violated all the estimates of the regression including regression coefficients, standard errors, and
tests of statistical significance may be biased (Keith, as cited in Ballance, n.d.).
Standard multiple regression can only accurately estimate the relationship between dependent
and independent variables if the relationships are linear in nature. If the relationship between
independent variables (IV) and the dependent variable (DV) is not linear, the results of the
regression analysis will under-estimate the true relationship. This underestimation carries two
risks: increased chance of a Type II error for that IV, and in the case of multiple regression, an
increased risk of Type I errors (overestimation) for other IVs that share variance with that IV
(Osbourne & Waters, 2002).
3.8.2 Independence of Observations (Autocorrelation Test)
Also called serial correlation. This can be done using Durbin-Watson Statistic or Wooldridge
Test. It checks for unwanted serial correlation between the residuals. In panel data, it checks for
correlation among the firms and time period. Keith and Stevens (as cited in Ballance, n.d.),
observe that when independence of errors is violated, standard scores and significance tests will
not be accurate and there is increased risk of Type I error.
In educational and social science research it is often difficult to measure variables, which makes
measurement error an area of particular concern. Independence of errors refers to the assumption
that errors are independent of one another, implying that subjects are responding independently
(Stevens, as cited in Ballance, n.d.).
48
3.8.3 Multicollinearity Test
Multicollinearity refers to the existence of a perfect or exact linear relationship among some or
all explanatory variables, Gujurati (as cited in Musa, 2015). This test will be conducted to
ascertain the unfavourable relationship which exist between the independent variables which will
be detrimental to the outcome of the study. If the multicollinearity is perfect, the regression
coefficients of independent variables are indeterminate and their standard error would be infinite.
And if multicollinearity is less than perfect, the regression coefficients although determinate,
possess large standard errors (in relation to the coefficients themselves), which means the
coefficients cannot be estimated with great precision or accuracy (Musa, 2015).
Multicollinearity occurs when the independent variables are not independent from each other.
The study tested for the existence of multicollinearity, using variance inflation factor (VIF) and
the tolerance value. Any Variance Inflation Factor (VIF) greater or equal to 4, signifies presence
of multicollinearity. According to Gujurati (as cited in Musa, 2015), any variable that have VIF
above 10 and tolerance values less than 0.10, is a strong indication of the existence of excessive
multicollinearity, and VIF of less than 10 and Tolerance values of less than 1 respectively proves
the absence of multicollinearity.
3.8.4 Heteroscedasticity Test (using Breusch-Pagan/ Cooks-Weisberg)
Homoscedasticity is one of the assumptions of linear regression model. It states that variance of
the error term (residuals) must be constant. If the errors do not have a constant variance, they are
said to be heteroscedastic (Brooks, as cited in Musa, 2015). Also as states by Osbourne & Waters
(2002): Homoscedasticity means that the variance of errors is the same across all levels of the
49
IV. When the variance of errors differs at different values of the IV, heteroscedasticity is
indicated. Slight heteroscedasticity has little effect on significance tests, but when it is marked it
can lead to serious distortion of findings and seriously weaken the analysis thus increasing the
possibility of a Type I error.
Regression assumes that variance of error terms are similar across the values of the independent
variables. Plot of standardized residuals versus predicted values can also show whether points
are equally distributed across all values of the independent variables. Woolridge (1999) as noted
by Musa (2015) states that homoscedasticity fails whenever the variance of the unobservable
changes across different segments of the population, which are determined by the different
values of the explanatory variables. The Breusch-Pagan\Cook-Weisberg test for
heteroscedasticity will be used to test the presence of the heteroscedasticity.
3.8.5 Panel Effect Test
This is to compare the effectiveness of the Ordinary Least Square (OLS) regression against
Random Effect Model (REM). It’s done using Breusch/Pagan Test for Random Effect.
If any of the above assumptions is violated (i.e. if there are nonlinear relationships between
dependent and independent variables, presence of heteroscedasticity, data is not normally
distributed, presence of multicollinearity or autocorrelation), then the results are likely to be
inefficient or seriously biased.
50
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction
This section presents the descriptive statistics and regression analysis results. The overall results
of the model analysis and all diagnostic tests conducted were presented with full interpretation
and discussion of the results. As explained in section 3.8 above, the regression analysis would be
preceded by diagnostic tests to check the suitability and compliance of the data for the multiple
regression analysis. The diagnostic tests carried out are: linearity, autocorrelation,
multicollinearity, heteroscedasticity and panel effect test.
4.2 Descriptive Statistics
Table 3: Descriptive Statistics

ROA ROE COD COE SIZ LEV GRW
Mean 0.01 0.33 0.02 0.09 0.08 0.84 0.05
Standard Error 0.00 0.12 0.01 0.01 0.00 0.03 0.02
Median 0.01 0.17 0.03 0.08 0.08 0.90 0.06
Mode 0.03 0.00 0.03 0.14 0.08 0.90 0.13
Standard Deviation 0.03 0.73 0.08 0.05 0.01 0.16 0.10
Sample Variance 0.00 0.53 0.01 0.00 0.00 0.03 0.01
Kurtosis 0.86 14.40 18.04 -0.47 -0.13 1.19 1.82
Skewness -0.75 3.38 -3.18 0.19 -1.24 -1.68 0.90
Range 0.12 4.49 0.56 0.22 0.02 0.51 0.50
Minimum -0.06 -0.78 -0.35 0.00 0.06 0.47 -0.13
Maximum 0.06 3.71 0.20 0.22 0.08 0.98 0.36
Sum 0.42 11.38 0.62 3.05 2.70 28.40 1.56
Count 34 34 34 34 34 34 34
Source: Researcher’s Computation using Microsoft Excel 2013
Summary of descriptive statistics for the longitudinal panel data including the mean, median,
standard deviation, skewness, kurtosis etc is presented in table 2 above. The sample comprises of
51
four listed companies during the period 2008 to 2017. All the four listed companies remain in the
estimation. The key values of interest in the table for our research model are:
a. Count: This is the number of observations for the research population. That is the
combined study periods for all the study populations. We have 34 observation periods
between the year 2008 and 2017 for the 4 listed companies.
b. Mean: The mean is the central or average point of the variable data. The mean COD and
COE of the companies are 2% and 9% respectively. This means that the total cost of
capital is 11% as against the ROA of 1% and ROE of 33% for the study period. The
minimum and maximum values for COD and COE are -35%, 0.0% and 20%, 22%, while
those of ROA and ROE are -6%, -78% and 6%, 371%.
c. Standard Deviation (Std. Dev.): This measures the amount of deviation within the
variables data. Basically, a small standard deviation means that the values in a statistical
dataset are close to the mean of the data set, and a large standard deviation means that the
values in the dataset are farther away from the mean. ROA, ROE, COD and COE have
standard deviations of 0.00, 0.12, 0.01 and 0.01 respectively. This means all the focus
variables have relatively smaller deviations (less than 15%).
d. Skewness: This is a measure of the lack of symmetry in a given data set. A distribution,
or data set, is symmetric if it looks the same to the left and right of the center point. It is a
test of normality. A symmetrical dataset will have a skewness equal to 0. Hence a normal
distribution will have a skewness of 0. If the skewness is between -0.5 and 0.5, the data
are fairly symmetrical; If the skewness is between -1 and – 0.5 or between 0.5 and 1, the
data are moderately skewed; If the skewness is less than -1 or greater than 1, the data are
highly skewed (McNeese, 2016). The datasets for the ROA, ROE and COD are highly
52
skewed given that they -0.75, 3.38 and -3.18 respectively. However, COE dataset is fairly
symmetrical given that it is 0.19
e. Kurtosis: This value is often compared to the kurtosis of the normal distribution, which is
equal to 3. If the kurtosis is greater than 3, then the dataset has heavier tails than a
normal distribution. If the kurtosis is less than 3, then the dataset has lighter tails than a
normal distribution (McNeese, 2016). ROA and COE have kurtosis of 0.86 and -0.47
which represents lighter tails than normal distribution. ROE and COD have values of
14.40 and 18.04 which represents heavier tails than normal distribution. In summary, the
data is not normally distributed.
4.3 Diagnostic Tests and Regression Analysis
a. Linearity Test
.05
0
-.05
-.1
-.4 -.2 0 .2
COD
ROA Fitted values
Fig. 2: Linearity Test ROA against COD – Equation 1

Source: Researcher’s Computation using STATA 12.1
53
The linearity scatterplot in figure 2 above shows a relatively negative correlation between the
ROA and COD dataset.
.05
0
-.05
-.1
0 .05 .1 .15 .2 .25

COE
ROA Fitted values
Fig. 3: Linearity Test ROA against COE – Equation 1

The linearity scatterplot in figure 3 above shows a relatively strong positive correlation between
the ROA and COE dataset.
4
3
2
1
0
-1
-.4 -.2 0 .2
COD
ROE Fitted values
Fig. 4: Linearity Test ROE against COD – Equation 2

54
The linearity scatterplot in figure 4 above shows a slight negative correlation between the ROE
and COD dataset.
4
3
2
1
0
-1
0 .05 .1 .15 .2 .25

COE
ROE Fitted values
Fig. 5: Linearity Test ROE against COE – Equation 2

The linearity scatterplot in figure 5 above shows a relatively strong positive relation between the
ROE and COE dataset.
b. Autocorrelation Test

Wooldridge test for autocorrelation in panel data
H0: no first order autocorrelation
F( 1, 3) = 3.692
Prob > F = 0.1504
Also referred to as serial correlation. Linear regression assumes there should be independence of
observations (i.e. independence of residuals). This implies that there shouldn’t be correlation
between the residuals (i.e. the firms (i) and period (t) in panel data). From the table 4 above, the
55
Prob > F is 0.1504. This means that the presence of autocorrelation is insignificant, hence we
accept the null hypothesis.

Wooldridge test for autocorrelation in panel data
H0: no first order autocorrelation
F( 1, 3) = 86.857
Prob > F = 0.0026
From the table 5 above, the Prob > F is 0.0026. This means that the presence of autocorrelation is
significant, hence we reject the null hypothesis.
c. Multicollinearity Test

Variable VIF 1/VIF
coe 2.93 0.341144
lev 2.32 0.430494
siz 1.72 0.582258
grw 1.13 0.884689
cod 1.08 0.92815
Mean VIF 1.84
Any Variance Inflation Factor (VIF) greater or equal to 4, signifies presence of multicollinearity.
There is no evidence of multicollinearity between the variables given that the highest value is
2.93. 1/VIF is the Tolerance level. Any tolerance value greater than 1 signifies presence of
multicollinearity. The results from table 6 indicates no presence of multicollinearity.
56
Variable VIF 1/VIF
coe 2.93 0.341144
lev 2.32 0.430494
siz 1.72 0.582258
grw 1.13 0.884689
cod 1.08 0.92815
Mean VIF 1.84
The results from table 7 above indicates no presence of multicollinearity.
d. Heteroscedasticity Test

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of roa
chi2(1) = 1.51
Prob > chi2 = 0.2199
Regression data needs to show homoscedasticity, which is where the variances along the line of
best fit remain similar as you move along the line. The Error Term is the residual inserted in the
model to account for all other variables that may affect outcome of the DV but which are not in
the model. From table 8 above, the prob > chi2 is 0.2199 (which is greater than 0.05), this means
that the presence of heteroscedasticity is insignificant, hence the model residuals are
homoscedastic.

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity
Ho: Constant variance
Variables: fitted values of roe
chi2(1) = 32.83
Prob > chi2 = 0.0000
57
From table 9 above, the prob > chi2 is 0.0000 (which is less than 0.05), this means that the
presence of heteroscedasticity is significant.
e. Panel Effect Test (Breusch/Pagan Test for Random Effect)

Breusch and Pagan Lagrangian multiplier test for random effects
roa [panel,t] = Xb + u[panel] + e[panel,t]
Estimated results:
Var sd = sqrt(Var)
roa .0007488 .027365
e .0006132 .0247633
u 0 0
Test: Var(u) = 0
chibar2(01) = 0.00
Prob > chibar2 = 1.0000
The Breusch/Pagan Test result from table 10 above reveals that there is insignificant panel effect
for the research model, since our prob>chibar2 = 1.0000 is greater than the significance value of
0.05. Hence, there is no need for Random Effect Model or Fixed Effect Model since panel effect
is insignificant. Therefore the OLS Regression will be adopted for the model.

Breusch and Pagan Lagrangian multiplier test for random effects
roe [panel,t] = Xb + u[panel] + e[panel,t]
Estimated results:
Var sd = sqrt(Var)
roe .5297497 .7278391
e .4196658 .6478162
u 0 0
Test: Var(u) = 0
chibar2(01) = 0.00
Prob > chibar2 = 1.0000
58
The Breusch/Pagan Test result from table 11 above reveals that there is insignificant panel effect
for the research model, since our prob>chibar2 = 1.0000 is greater than the significance value of
0.05. Hence, there is no need for Random Effect Model or Fixed Effect Model since panel effect
is insignificant. Therefore the OLS Regression will be adopted for the model.
f. OLS Regression Result
Equation 1: ROA = 0.1926936 + -0.0170725CoDit + 0.4785847CoEit + -1.636426SIZit + -

0.1164561LEVit + 0.867888GRWit

Source SS df MS Number of obs 34
Model .009265124 5 .001853025 F( 5, 28) 3.36
Residual .015446641 28 .000551666 Prob > F 0.0168
Total .024711764 33 .000748841 R-squared 0.3749
Adj R-squared 0.2633
Root MSE 0.02349
roa Coef. Std. Err. t P>t [95% Conf. Interval]
cod -.0170725 .0552824 -0.31 0.76 -0.13031 0.096169
coe .4785847 .130511 3.67 0.001 0.211245 0.745924
siz -1.636426 .7399115 -2.21 0.035 -3.15207 -0.12079
lev -.1164561 .0394001 -2.96 0.006 -0.19716 -0.03575
grw .0867888 .0419269 2.07 0.048 0.000905 0.172672
_cons .1926936 .0711695 2.71 0.011 0.04691 0.338478
59
Equation 2: ROE = 0.1926936 + -0.0170725CoDit + 0.4785847CoEit + -1.636426SIZit + -
0.1164561LEVit + 0.867888GRWit

Source SS df MS Number of obs 34
Model 3.59305586 5 .718611172 F( 5, 28) 1.45
Residual 13.8886843 28 .49602444 Prob > F 0.238
Total 17.4817402 33 .529749702 R-squared 0.2055
Adj R-squared 0.0637
Root MSE 0.70429
roe Coef. Std. Err. t P>t [95% Conf. Interval]
cod -.60523 1.65768 -0.37 0.718 -4.00083 2.790374
coe 8.531497 3.913456 2.18 0.038 0.515145 16.54785
siz -32.75729 22.18673 -1.48 0.151 -78.2048 12.69017
lev -.6304166 1.181438 -0.53 0.598 -3.05048 1.78965
grw -.3475086 1.257206 -0.28 0.784 -2.92278 2.22776
_cons 2.719341 2.134064 1.27 0.213 -1.65209 7.090773
Interpretations of the Regression Results
Given that equation 2 (with ROE as dependent variable) is not fit with a p-value of 0.238, we are
adopting equation 1 which has a p-value of 0.0168 which is below the significance level at 5%.
Hence for analyzing our model, the research will adopt ROA Model (Equation 1) as measure for
financial performance.
i. Number of obs: This is the number of observations used in the regression analysis.
ii. F (5, 28): Referred to as the degree of freedom. The F-value is the Mean Square
Model (.001853025) divided by the Mean Square Residual (.000551666), yielding
F=3.36.
iii. Prob > F: This value gives the overall fitness of the model. The p-value associated
with this F value for the model is (0.0168). The p-value is compared to the
significance level (alpha = 0.05 or 5%) and, if smaller, we can conclude "Yes, the
independent variables reliably predict the dependent variable". whereas if the p-value
60
is greater than 0.05, we can conclude that the group of independent variables does not
show a statistically significant relationship with the dependent variable, or that the
group of independent variables does not reliably predict the dependent variable. Note
that this is an overall significance test assessing whether the group of independent
variables when used together reliably predict the dependent variable, and does not
address the ability of any of the particular independent variables to predict the
dependent variable. Given that our p-value is 0.0168 which is less than 0.05, we can
conclude that the group of independent variables does show statistically significant
relationship with the dependent variable.
iv. R-squared: R-Squared is the proportion of variance in the dependent variable DV
which can be predicted from the independent variables IVs. Meaning the extent to
which the IVs explain the DV. It ranges from 0 to 1 (i.e. 0-100%). 0% indicates that
the IVs explains none of the variability of the DV. Our value explains that only
37.49% of the variance in DV is predicted from the IVs. Note that this is an overall
measure of the strength of association, and does not reflect the extent to which any
particular IV is associated with the DV.
v. Adj R-squared: As predictors are added to the model, each predictor will explain
some of the variance in the dependent variable simply due to change. One could
continue to add predictors to the model which would continue to improve the ability
of the predictors to explain the DV. The adjusted R-square attempts to yield a more
honest value to estimate the R-squared for the population. Simply put, the Adjusted
R-square is the R-quare adjusted for the research population and predictors. Giving
61
that our value is -0.2633, we can conclude that our IVs explain only 26.33% variation
of our DV.
vi. roa: This column shows the dependent variable at the top (roa) with the IVs below it
(cod, coe, siz, lev, grw and _cons). The last variable (_cons) represents the constant,
represented in the model as ‘α’, also referred to as the Y intercept (i.e. the height of
the regression line when it crosses the Y axis). In other words, it is the predicted
value of roa when all other variables are 0.
vii. Coef.: Measures direction and magnitude to which changes in individual IV can
influence the DV, assuming all other IVs remain constant. These are the β values for
the regression equation for predicting the dependent variable from the independent
variables. These estimates tell the amount of increase in the DV that would be
predicted by a 1 unit increase in the IVs. The results shows a negative 0.0170725
relationship between COD and ROA and a positive 0.4785847 relationship between
COE and ROA.
viii. Std. Err.: These are the standard errors associated with the coefficients. The
standard error is used for testing whether the parameter is significantly different from
0 by dividing the parameter estimate by the standard error to obtain a t-value (see the
column with t-values and p-values). The standard errors can also be used to form a
confidence interval for the parameter, as shown in the last two columns of the table.
ix. t and P>|t| – These columns provide the t-value and 2-tailed p-value used in testing
the null hypothesis that the coefficient is 0 (UCLA, n.d.). The research is adopting p-
values to test the hypotheses. Each p-value is compared to our alpha of 0.05.
62
Variables having p-values less than alpha are statistically significant (i.e., we can
reject the null hypothesis and say that the coefficient is significantly different from 0).
x. [95% Conf. Interval] – This shows a 95% confidence interval for the coefficient. if
the confidence interval does not include 0, there is good evidence that IVs and DV are
related. If IVs and DV are not related, the coefficient will be 0. So the confidence
interval checks whether the model is useful for prediction. The confidence interval
simply gives the range of coefficient values of the predictor which we are 95%
confident of. A summary of the interpretations for the regression result is outlined
below:
Table 14: Summary of Regression Coefficients and P-values

Variables Coefficients P-values (α = 0.05)
Cod -.0170725 For every unit increase in Cost of Debt, 0.76 Insignificant effect.
there will be a negative 0.0170725unit
increase in ROA, holding all other
variables constant.
Coe .4785847 For every unit increase in Cost of 0.001 Significant effect.
Equity, there will be a positive
0.4785847 unit increase in ROA,
holding all other variables constant.
_cons .1926936 This is the predicted value of ROA if all 0.011 Significant effect.
other variables are constant.
63
4.4 Test of Hypotheses
Based on the regression results for the research models, the following answers were confirmed
for the research test on the hypotheses:
Research Hypotheses: Regression Result:

a. Ho1 - Cost of Debt have insignificant effect a. Insignificant negative effect, hence
on financial performance of listed accept the null hypothesis.
Construction Companies in Nigeria.
b. Ho2 - Cost of Equity have insignificant b. Significant positive effect, hence reject
effect on financial performance of listed the null hypothesis.
Construction Companies in Nigeria.
4.5 Discussion of Findings
The findings on Cost of Equity and Financial Performance concur with the previous studies by
Embong, Saleh and Hassan (2012), Tsai and Chen (2015). However, the findings disagree with
the previous research by Mohammad and Qamar (2011), Ibrahim and Ibrahim (2015), Lucky
(2017). On the other hand, findings on Cost of Debt and Financial Performance concur with the
previous studies by Raja and Dave (2015), Lucky (2017). However, the findings disagree with
the previous research by Jeon and Kim (2015).
Given that the research seeks to answer questions to the problem of the effect, magnitude and
direction of cost of capital on financial performance of listed construction companies in Nigeria,
with specific emphasis on the two key components of cost of capital (debt and equity), we can
conclude that cost of debt has insignificant negative effect on the financial performance of
construction companies in Nigeria. This implies that debt capital is generally not favourable with
regards to financial performance even though the effect is insignificant since it is negative.
64
On the other hand, cost of equity has a significant effect on the financial performance of
construction companies in Nigeria. This implies that equity capital is generally a good instrument
for corporate managers given that it has a positive effect on the financial performance of
construction companies in Nigeria.
As earlier stated in section 2.6, many of the previous studies are on combined cost of capital and
financial performance, very little was done on cost of equity and firm performance or cost of
debt on firm performance alone.
The results also concur with the adopted research theory of Net Operating Income if we look at it
from cost of debt point of view. The theory hypothesize that cost of capital does not affect firms
performance (proxied by value). This is also in line with many of the previous researches
including that of Modigliani & Miller, Mohammed & Qamar, Al-Tamimi & Obeidat, Agustini.
65
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
The research contains five chapters namely: Introduction, Literature Review, Methodology, Data
Presentation & Analysis and Conclusion/Recommendations. The first Introduction chapter detail
out the background of the study, explained the statement of the problem, research questions and
objective, and the significance and scope of the study.
Chapter two covers conceptual definitions/framework for the research, and also presents the
theories upon which the study was conceived from. Theoretical literatures and key previous
empirical studies on the topic were exhaustively reviewed and synthesized. Gap in the previous
studies was also detailed out.
Chapter three is the Methodology. It explains the strategy employed and adopted in carrying out
the research work. It also discusses the research design, population of the study, and various
methods adopted in the collection of data for the research. The chapter detailed out the research
model used, the method of analyses for testing the hypotheses and the concepts adopted for
measuring the variables.
Chapter four presents the descriptive statistics and regression results. The overall results of the
model analysis and all diagnostic tests conducted were presented with full interpretation and
discussion of the results. As explained in section 3.8 above, the regression analysis would be
preceded by diagnostic tests to check the suitability and compliance of the data for the multiple
66
regression analysis. The diagnostic tests carried out are: linearity, autocorrelation,
multicollinearity, heteroscedasticity and panel effect test.
Finally, this chapter five is a recap of all the previous chapters. The chapter draws out conclusion
of all the findings of the study and makes recommendations based on the findings.
5.2 Conclusion
The main objective of this research is to examine the effect of cost of debt and cost of equity
capital on financial performance of listed construction companies in Nigeria. According to
previous studies, there is conflicting findings on the subject matter. Many studies have found that
cost of debt and cost of equity significantly affect firms’ performance on one hand, and other
studies conclude that they don’t significantly affect firms’ performance on the other hand.
Overall our study found that cost of debt has insignificant effect on construction firms’
performance, however the effect is negatively related to the performance. On the other hand, the
study finds that cost of equity has a significant effect on performance and they are positively
related. The findings concurs with the adopted research theory of Net Operating Income if we
look at it from cost of debt point of view. The theory hypothesize that cost of capital does not
affect firms performance (proxied by value). This is also in line with many of the previous
researches including that of Modigliani & Miller, Mohammed & Qamar, Al-Tamimi & Obeidat,
Agustini.
67
Looking at the findings from Cost of Equity and Financial Performance, we can conclude that
the results concur with the previous studies by Embong, Saleh and Hassan, Tsai and Chen.
However, the findings disagree with the previous research by Mohammad and Qamar, Ibrahim
and Ibrahim, Lucky.
However, it is pertinent to note that of all the previous studies reviewed in this research, none of
them covers the same population (Nigerian construction companies) as the study. Hence we can
also conclude that this is the first study conducted on the effect of cost of capital (debt and equity
capital) on construction companies in Nigeria.
5.3 Recommendations
Based on the results of the study, it would be ideal to advice any corporate manager of
construction company in Nigeria to make concerted effort in obtaining equity capital given that it
has positive significant effect on firms’ performance. However, with regards debt capital, it is
not advisable for the corporate entities to seek for such finances due to the negative effect it has
on firms’ performance, even though the effect is insignificant. Because going by the strict
economic ideal, any negative or positive effect on company finances whether significant or
otherwise cannot be overlooked.
As earlier stated, the construction industry’s role in the Nigerian Capital is nothing to write home
about. There are only four listed companies in the NSE currently, and one disappointing fact is
that only one of the listed companies (UPDC) is owned by Nigerians.
68
Government should introduce a criteria, in which any company that needs to bid for a project of
certain amount (e,g, One Billion Naira) and above, must be listed in the NSE. However the
government should put all mechanisms and resources (e.g. low interest loans, subsidy on
importation of construction equipment, strict adherence to regulations, dedicate certain amount
of projects for indigenous firms only etc) to support the indigenous firms in getting listed. This
will make the companies put all necessary effort in ensuring adequate accounting systems and
improve financial prudence amongst them.
5.4 Limitations and Further Studies
It is well observed that there is a huge shortfall of studies on effect of cost of debt and equity on
financial performance of construction companies, especially in Nigeria. Owing to the fact that
the construction industry is an integral part of every developed or developing economy, and in
Nigeria it accounts for 3.77% of the GDP as at 2017 which accounts for over four (4) trillion
naira, further research on the sector cannot be overemphasized.
Given that the research only covers 10 years and the listed companies are only four, further
studies need to be undertaken to widen the period and include many other construction firms in
Nigeria which aren’t even listed. Perhaps it could be wise to do a further research on all
construction firms in Nigeria with turnover of One Hundred Million Naira and above. Because it
is quite astonishing and unwise to say that a study has been conducted on construction
companies in Nigeria without big names like Dantata & Sawoe, Setraco, CCECC, Arab
Contractors, Reynolds Construction etc.
69
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76
APPENDIX 1 – ANALYSED RAW DATA
Longitudinal Data for: ROAit = α + β1CoDit + β1CoEit + β1SIZit + β1LEVit + β1GRWit + eit
PANEL YEAR ROA COD COE SIZ LEV GRW
1 2012 0.032 0.027 0.135 0.084 0.898 0.127
1 2013 0.010 0.045 0.141 0.084 0.901 -0.043
1 2014 -0.015 -0.014 0.085 0.084 0.902 0.058
1 2015 0.060 0.012 0.141 0.067 0.984 0.017
1 2016 -0.002 0.001 0.085 0.066 0.983 -0.133
1 2017 0.002 0.001 0.061 0.067 0.976 0.363
2 2008 0.032 0.027 0.135 0.084 0.898 0.127
2 2009 0.010 0.045 0.141 0.084 0.901 -0.043
2 2010 -0.015 -0.014 0.085 0.084 0.902 0.058
2 2011 0.016 0.037 0.084 0.084 0.891 0.063
2 2012 0.045 0.022 0.225 0.083 0.915 0.039
2 2013 0.035 0.022 0.159 0.084 0.907 0.269
2 2014 0.032 0.027 0.135 0.084 0.898 0.127
2 2015 0.010 0.045 0.141 0.084 0.901 -0.043
2 2016 -0.015 -0.014 0.085 0.084 0.902 0.058
2 2017 0.016 0.037 0.084 0.084 0.891 0.063
3 2008 0.032 0.027 0.135 0.084 0.898 0.127
3 2009 0.010 0.045 0.141 0.084 0.901 -0.043
3 2010 -0.015 -0.014 0.085 0.084 0.902 0.058
3 2011 0.016 0.037 0.084 0.084 0.891 0.063
3 2012 0.028 0.001 0.028 0.065 0.892 0.036
3 2013 0.011 0.004 0.032 0.065 0.870 -0.120
3 2014 0.038 0.001 0.024 0.066 0.856 0.210
3 2015 -0.065 0.006 0.043 0.065 0.917 -0.020
4 2008 0.032 0.027 0.135 0.084 0.898 0.127
4 2009 0.010 0.045 0.141 0.084 0.901 -0.043
4 2010 -0.015 -0.014 0.085 0.084 0.902 0.058
77
4 2011 0.016 0.037 0.084 0.084 0.891 0.063
4 2012 0.031 0.034 0.029 0.079 0.562 0.034
4 2013 0.048 0.072 0.030 0.078 0.489 -0.081
4 2014 0.053 0.060 0.027 0.078 0.470 0.039
4 2015 0.005 -0.354 0.005 0.079 0.506 0.057
4 2016 -0.022 0.087 0.009 0.079 0.520 -0.015
4 2017 -0.046 0.203 0.011 0.078 0.479 -0.089
78
Longitudinal Data for: ROEit = α + β1CoDit + β1CoEit + β1SIZit + β1LEVit + β1GRWit + eit
PANEL YEAR ROE COD COE SIZ LEV GRW
1 2012 0.216 0.027 0.135 0.084 0.898 0.127
1 2013 1.806 0.045 0.141 0.084 0.901 -0.043
1 2014 1.311 -0.014 0.085 0.084 0.902 0.058
1 2015 3.706 0.012 0.141 0.067 0.984 0.017
1 2016 -0.117 0.001 0.085 0.066 0.983 -0.133
1 2017 0.005 0.001 0.061 0.067 0.976 0.363
2 2008 0.378 0.027 0.135 0.084 0.898 0.127
2 2009 0.422 0.045 0.141 0.084 0.901 -0.043
2 2010 0.363 -0.014 0.085 0.084 0.902 0.058
2 2011 0.453 0.037 0.084 0.084 0.891 0.063
2 2012 0.529 0.022 0.225 0.083 0.915 0.039
2 2013 0.373 0.022 0.159 0.084 0.907 0.269
2 2014 0.316 0.027 0.135 0.084 0.898 0.127
2 2015 0.100 0.045 0.141 0.084 0.901 -0.043
2 2016 -0.151 -0.014 0.085 0.084 0.902 0.058
2 2017 0.001 0.037 0.084 0.084 0.891 0.063
3 2008 0.380 0.027 0.135 0.084 0.898 0.127
3 2009 0.387 0.045 0.141 0.084 0.901 -0.043
3 2010 0.355 -0.014 0.085 0.084 0.902 0.058
3 2011 0.253 0.037 0.084 0.084 0.891 0.063
3 2012 0.259 0.001 0.028 0.065 0.892 0.036
3 2013 0.087 0.004 0.032 0.065 0.870 -0.120
3 2014 0.264 0.001 0.024 0.066 0.856 0.210
3 2015 -0.785 0.006 0.043 0.065 0.917 -0.020
4 2008 0.119 0.027 0.135 0.084 0.898 0.127
4 2009 0.080 0.045 0.141 0.084 0.901 -0.043
4 2010 0.076 -0.014 0.085 0.084 0.902 0.058
4 2011 0.056 0.037 0.084 0.084 0.891 0.063
4 2012 0.070 0.034 0.029 0.079 0.562 0.034
79
4 2013 0.094 0.072 0.030 0.078 0.489 -0.081
4 2014 0.100 0.060 0.027 0.078 0.470 0.039
4 2015 0.011 -0.354 0.005 0.079 0.506 0.057
4 2016 -0.046 0.087 0.009 0.079 0.520 -0.015
4 2017 -0.088 0.203 0.011 0.078 0.479 -0.089
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MBA Project - YSG - Complete 2019 - 07

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MBA Project - YSG - Complete 2019 - 07

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EFFECT OF COST OF CAPITAL ON FINANCIAL PERFORMANCE OF LISTED

CONSTRUCTION COMPANIES IN NIGERIA

YUSUF SHEHU GIWA

DEPARTMENT OF ACCOUNTING AND MANAGEMENT

FACULTY OF ARTS AND SOCIAL SCIENCES

NIGERIAN DEFENCE ACADEMY,

CONSTRUCTION COMPANIES IN NIGERIA

YUSUF SHEHU GIWA

BEING A RESEARCH PROJECT SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING AND MANAGEMENT, FACULTY OF ARTS AND SOCIAL SCIENCES,

NIGERIAN DEFENCE ACADEMY, KADUNA IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF MASTER OF BUSINESS ADMINISTRATION

Performance of Listed Construction Companies in Nigeria” is the product of my research effort

YUSUF SHEHU GIWA ___________________ _________________

Performance of Listed Construction Companies in Nigeria” by YUSUF SHEHU GIWA

(NDA/PGS/FASS/MBA/357/16) was supervised by me.

Dr. AA Alexander ________________ _______________

Social Sciences, Nigerian Defence Academy, Kaduna and is hereby approved.

Dr. AA Alexander ___________________ _________________

Dr. J. Okpanachi ___________________ _________________

___________________ ___________________ _________________

Prof. YA Umar ___________________ _________________

reward them with a place in Jannatul-Firdaus.

prophets, Muhammad (S.A.W), his family and all his companions.

My sincere appreciation to my family and friends/colleagues at Nigerian Defence Academy

NDA who were always supporting me with physically and psychologically.

TABLE OF CONTENTS vii

LIST OF APPENDICES xii

CHAPTER ONE – INTRODUCTION 1

1.1 Background to the Study 1

1.2 Statement of the Problem 2

1.3 Research Questions 4

1.4 Objective of the Study 4

1.5 Hypotheses of the Study 5

1.6 Significance of the Study 5

1.7 Scope of the Study 5

CHAPTER TWO – LITERATURE REVIEW 7

2.2 Conceptual Review 7

2.2.2 Cost of Capital 9

2.3 Theoretical Reviews 10

2.3.1 Nigerian Construction Industry and the Economy 11

2.3.2 Major Loopholes in Nigerian Construction Industry 13

2.3.3 Cost of Capital for Construction Companies in Nigeria 16

2.4 Empirical Review 22

2.5 Gap in the Literature 40

CHAPTER THREE – METHODOLOGY 41

3.2 Research Design 41

3.4 Model Specification 42

3.5 Variables Definition and Measurement 43

3.6 Sources and Methods of Data Collection 46

3.7 Data Analysis Techniques 46

3.8 Diagnostic Tests 47

3.8.1 Linearity Test 47

3.8.2 Independence of Observations (Autocorrelation Test) 48

3.8.3 Multicollinearity Test 49

3.8.4 Heteroscedasticity Test 49

3.8.5 Panel Effect Test 50

4.2 Descriptive Statistics 51

4.3 Diagnostic Tests and Regression Analysis 53

4.4 Test of Hypotheses 64

4.5 Discussion of Findings 64

CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATIONS 66

5.4 Limitations and Further Studies 69

YUSUF SHEHU GIWA ___ _

Dr. AA Alexander __ _

Dr. AA Alexander ___ _

Dr. J. Okpanachi ___ _

_________ _ _________

Prof. YA Umar ___ _