Debt Financing, Investment Efficiency, and Overinvestment Constraints in Nigerian Listed Firms

Debt financing is theorised to discipline managerial investment behaviour by imposing hard budget constraints, reducing free cash flow available for value-destroying investments, and aligning managerial interests with creditor demands for financial prudence. This study examines whether debt financing improves investment efficiency by constraining overinvestment among Nigerian listed firms. Secondary panel data from 65 non-financial firms listed on the Nigerian Exchange Group across seven sectors for the period 2016 to 2022 are assembled from audited financial statements. Investment efficiency is measured using the Richardson overinvestment model, which estimates expected investment based on firm fundamentals and defines overinvestment as the positive residual from this model. The study then regresses overinvestment residuals on leverage ratio, debt maturity, bank versus bond debt composition, and a set of governance and firm-level controls. An endogeneity-corrected instrumental variable approach is employed, using the lagged Herfindahl-Hirschman index of industry concentration as an instrument for debt choice. The theoretical framework draws on Jensen's free cash flow hypothesis, the debt overhang model, and the investment-cash flow sensitivity literature. The study disaggregates findings by firm ownership type, comparing state-owned and family-controlled firms with diffused-ownership companies to assess whether governance context moderates the debt-investment efficiency relationship. Existing Nigerian literature on the topic is largely indirect, inferring investment discipline from profitability improvements rather than directly measuring overinvestment. This study's direct modelling of overinvestment contributes a methodological advance to the Nigerian corporate finance literature. Findings are intended for institutional investors, corporate treasurers, and the Securities and Exchange Commission's continuous disclosure requirements team. Keywords: debt financing, investment efficiency, overinvestment, Nigerian listed firms, free cash flow