The Interaction Effect of Leverage and Dividend Policy on Firm Value: Empirical Evidence from Nigerian Firms

This study investigates the dynamic relationship between leverage and dividend policy in Nigerian manufacturing enterprises. Utilizing panel data from 26 firms between 2016 and 2020, our findings reveal that while dividend payments boost firm value, leverage typically diminishes it. Intriguingly, when leverage interacts with dividend policy, the combined effect on firm value becomes significantly positive. This observation, despite Nigeria's institutional differences from advanced economies, supports modern capital structure theories such as the pecking order and static trade-off theories. Our results suggest that for mature Nigerian companies with limited growth opportunities, high leverage and dividends effectively mitigate the "free cash flow" problem, curbing managerial tendencies to overinvest or underinvest. Thus, leverage and dividends serve as complementary mechanisms for monitoring and controlling managerial discretion. Consequently, firms with high leverage ratios can leverage dividend policies as disciplinary tools, and vice versa. This underscores the necessity for Nigerian manufacturing firms to carefully balance debt and equity to sustain market confidence and investment potential.