Moderating Effect of Agency Costs on the Relationship Between Capital Structure and Value of Listed Manufacturing Firms in Nigeria

Abstract

This study explores the moderating effect of agency costs on the relationship between capital structure and firm value in listed manufacturing firms in Nigeria. The relationship between capital structure and firm value has long been a topic of interest in corporate finance, with capital structure decisions influencing firm performance and value. The main objective of this research is to examine how agency costs, particularly audit fees, and moderate the effect of long term and short-term debt on the value of these firms. Using secondary data from 120 listed manufacturing companies, this study employs an ex post facto research design and a fixed effects model to analyze the relationships. The findings indicate that both long-term and short-term debt have a significant positive impact on firm value, measured by Tobin’s Q. Moreover, audit fees were found to significantly moderate the relationship between capital structure and firm value, suggesting that firms with higher debt levels and greater financial complexity experience more pronounced effects on their firm value. These results are consistent with the agency theory, which emphasizes that high debt levels, when coupled with complex financial structures, lead to higher agency costs but may also enhance firm value if managed properly. The study recommends that firms carefully balance their debt levels to avoid financial distress while leveraging the benefits of tax shields. Policymakers should also consider strengthening regulatory frameworks to ensure that firms with complex capital structures are adequately monitored. Future research could examine the relationship between debt, agency costs, and firm value across different industries or regulatory environments to deepen the understanding of these dynamics.