Determinants of Capital Structure of the Firms Listed on the Nairobi Securities Exchange: a Case Study of the Automobile Firms

Abstract

Financial planning is an integral part of financial management which deals with the management of a firm’s funds with a view to maximizing profit and the wealth of shareholders. Capital structure is a vital financial planning principal which details on how the firms leverage is structured. Selection of an optimal capital structure is always a critical issue for every firm. The reason for this is of course, financial risk and tax advantage which are directly influenced by a company’s choice of capital structure. The aim of this research was to determine what influences the choice of capital structure of automobile companies listed on the Nairobi Securities Exchange. The factors which were tested are; growth of the firm, taxation, liquidity and dividend policy. The research study design was a census descriptive research. The research used secondary data which was analysed using SPSS. The population of interest in this study comprised of the more than 60 currently listed companies on the Nairobi Securities Exchange. The study used a census sampling technique. The sample for this study included all the automobile firms that were listed throughout the years 2007-2016. This study found out that growth of the firm, taxation, liquidity, and dividend policy are determinants of the capital structure of Automobile companies in Kenya. The most influential variable is the dividend policy followed by liquidity, then taxation and firm growth. Firm growth has the least impact on leverage of the automobile firms in Kenya. The study recommended that a well-adjusted combination of debt and equity be established so as to ensure that the firm maintains capital adequacy. Firms can thus be able to meet their financial compulsions and grasp investments that can promise attractive returns.