CAUSALITY TEST OF BUSINESS RISK AND CAPITAL STRUCTURE IN A PANEL DATA OF NIGERIAN LISTED FIRMS

In economic sense, some events may be subject to spill-over from economy-wide or world-wide shocks. For instance a country’s fiscal policy, such as government spending, taxation, and borrowings, influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Therefore, causal relationship may flow from business risk to financing structure of companies and vice versa. The objective of this study is to show that Granger (1969) Causality test can be conducted on a panel data comprising of time series and cross-sectional data set. This study used a dynamic panel data of publicly listed firms in Nigeria for the period of 2000-2006, to analyse the direction of causality between our measures of leverage and business risk using the causality approach described by Granger (1969). The overall, results indicates that increases in either business risk or total liabilities as a proportion of total assets do not Granger-cause or predict higher future values of both variables over the short-tomedium term. The implication is that an analysis of the relationship between capital structure and business risk in Nigeria could be estimated in a dynamic panel framework