Effect of Working Capital Management on the Capital Structure of Non-financial Firms Quoted in the Nairobi Securities Exchange
Abstract
Finance managers spend considerable time in making capital structure and working capital
decisions as they seek to maximize the value of the firm. The question on how managers make
a choice between debt and equity to optimize the capital of a firm has remained unanswered.
Many studies have been conducted, seeking to shed light on the various determinants of
capital structures adopted by firms. This study seeks to explore whether working capital
management, could be one of determinants of capital structure. This research aimed at
exploring the effect of the variables that make up working capital management on the debt
financing of 44non-financial public companies listed in the NSE between 2010 and 2015. The
working capital components considered in the study are debtors average collection days,
accounts payable average collection days, inventory conversion cycle and cash ratio, with
fixed assets to total assets ratio as a control variable. The study used secondary data obtained
from the published financial statements of the companies quoted in the NSE and analyzed
through multivariate regression analysis to establish the nature and the magnitude by which
working capital management components affects the leverage. The research revealed that there
is a positive relationship between inventory conversion period, average payment period and
fixed to total asset ratio and leverage. Relationship between debt ratio and Cash ratio was
revealed a negative relationship. Additionally, the study established that there is a correlation
between the independent variable, however the correlation was insignificant. The study
concluded that the management practices related to working capital in the non-financial public
companies listed in Nairobi Securities exchange influences capital structure, however, the
influence is insignificant. These findings are similar to the findings of other studies on
relationship between working capital and capital structure. The study recommends that finance
managers should consider average payment period, inventory conversion period, and cash
ratio components in working capital while making capital decisions. However, this
consideration should be only an addition to the other factors that factors that significantly
influences capital structure decisions, such as opportunities for growth, composition of fixed
assets in the total assets of the firm, profitability, tax consideration and size of the firm.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
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