EQUITY FINANCE IN THE CAPITAL STRUCTURE OF GOVERNMENT AND GOVERNMENT AGENCIES: A REVIEW

Abstract

This paper critically reviews the concept of equity finance as a foundational component of the capital structure of governments and their agencies, positioning it as an analogue to shareholder equity in corporate finance. Unlike debt financing, which entails repayment obligations and interest burdens,
equity finance—comprising tax revenues, grants, internally generated revenue (IGR), and retained earnings—represents non-repayable and endogenous resources used to support public expenditures. Drawing from theoretical frameworks including Musgrave’s public finance model and
the pecking order theory, the review identifies equity financing as essential for fiscal sovereignty, public accountability, and the long-term sustainability of government budgets. The study synthesizes
local and international empirical findings, including evidence from Nigerian subnational
governments, to show that balanced and strategic use of equity and debt instruments leads to better
fiscal outcomes. It critiques the misalignment of financing strategies, such as the use of debt for
recurrent expenditure, and highlights the fiscal risks and intergenerational inequities that follow.
The review also discusses the role of equity financing in state-owned enterprises and public
institutions as a means of reducing dependence on borrowing and enhancing financial autonomy.
This paper concludes by recommending policy reforms centred on broadening the tax base,
improving compliance, linking grants to performance, and promoting efficient public investment.
Emphasizing equity finance is imperative for improving fiscal performance, reducing debt
vulnerability, and enhancing governance, especially in resource-constrained economies like Nigeria.