TESTING THE PECKING ORDER HYPOTHESIS: SECTORAL ANALYSIS OF NON-FINANCIAL FIRMS' CAPITAL STRUCTURE BEHAVIOR AND MARKET VALUATION IN NIGERIA

This study investigates the applicability of the pecking order hypothesis and the relationship between capital structure and market valuation among non-financial quoted firms on the Nigeria Exchange. Panel data of 96 non-financial quoted firms were collected from the annual reports of non-financial quoted firms from 2016 to 2024. The research analyzes both aggregate and sectoral patterns using panel data techniques, with change in debt financing serving as the dependent variable for testing the pecking order hierarchy and market value per share (MVPS) as the proxy for market valuation. The results provide substantial support for the pecking order hypothesis in terms of financing behavior. The financing deficit variable (LnDEF) is positive and statistically significant across most samples and sectors confirming that firms increase debt usage when internal funds are insufficient. When linked to market valuation, retained earnings emerged as the most consistent and significant positive driver in several key subsamples and sectors, including agriculture (234.72, p < 0.000), service (4.376, p = 0.0001), and industrial goods (0.028, p = 0.043). Equity ratios frequently exert negative effects (notably significant in agriculture and ICT), while debt ratios show sector-dependent impacts, being strongly positive in real estate (107.37, p < 0.000). The models demonstrate strong explanatory power. Our findings indicate that Nigerian non-financial firms largely follow the pecking order hierarchy, although its application is partial and heavily moderated by sectoral characteristics. All firms together exhibit moderate pecking order behavior. Large firms, excluding growth firms, also display a moderate adherence to the pecking order hypothesis, whereas growth firms show only a weak pecking order pattern. Sectoral analysis further reveals that financing behaviour in the agricultural sector contradicts the pecking order hypothesis. In contrast, the health sector demonstrates a weak pecking order, whereas the consumer goods, industrial goods, ICT, and oil and gas sectors exhibit a moderate pecking order behavior. Firms in the services, conglomerate, and construction/real estate sectors display a strong pecking order pattern. Our findings also show that retained earnings consistently enhance market valuation, whereas equity issuance often carries a valuation penalty. These results affirm that in Nigeria’s emerging market context, capital structure decisions are relevant to shareholder value creation but operate pragmatically rather than as a rigid theoretical hierarchy. The study recommends that corporate managers prioritize the accumulation and deployment of retained earnings to maximize market value while exercising caution with equity financing. Policymakers should focus on reducing information asymmetries through improved disclosure standards and developing a more efficient corporate debt market to support firms in following an optimal financing hierarch