Determinants of Capital Structure Decisions in Nigerian Small and Medium Enterprises: An Empirical Investigation

Capital structure decisions critically influence SME growth and financial sustainability, yet their determinants in the Nigerian context differ fundamentally from large firm and developed market evidence, creating an important empirical gap. This study empirically investigated the determinants of capital structure decisions among 200 Nigerian SMEs across Lagos, Kano, Enugu, and Port Harcourt. Capital structure was measured by total debt-to-equity ratio and debt-to-assets ratio. Potential determinants assessed included profitability, asset tangibility, firm size, growth opportunities, business risk, owner education level, and financial institution relationship quality. Data were collected from SME financial records and owner-manager questionnaires over a 3-year observation period. Tobit regression was employed to account for the censored distribution of leverage ratios. Results showed that asset tangibility was the strongest positive determinant of leverage (beta = 0.43, p < 0.001), consistent with collateral-based lending theory. Profitability was significantly negatively related to leverage (beta = -0.31, p < 0.01), supporting the pecking order theory over the static trade-off theory for Nigerian SMEs. Firm size was a significant positive predictor (beta = 0.27, p < 0.05). Owner education positively moderated the relationship between financial institution relationship quality and debt access. Growth opportunities were not significant, suggesting Nigerian SME capital structure is constrained by supply-side lending factors rather than demand-driven growth aspirations. The study concludes that pecking order behaviour dominates Nigerian SME capital structure and recommends collateral-free lending innovations to expand debt access for profitable SMEs. Keywords: capital structure, SMEs, leverage, pecking order theory, Nigeria