Macro-economic Factors and Corporate Capital Structure: Evidence From Firms Listed at the Nairobi Stock Exchange

Abstract

This study analyzed macroeconomic factors and corporate capital structure by taking evidence from Non-financial firms listed at the Nairobi Stock Exchange. It utilized data for the period 2007 to 2017 that was drawn from annual reports by the Nairobi Stock exchange, respective annual company reports as well as Kenya Central Bank Website. The study applied panel data Regression specifically Random effects model to estimate the relationship between capital structure as the dependent variable and macroeconomic factors as the independent variables. Capital structure was represented by debt to equity ratio while the independent variables included annual inflation rate, interest rates, exchange rates, asset tangibility, company size measured by the logarithm of company’s total assets, FDI, GDP growth rate, savings as a ratio of GDP, financial development as well as stock market capital development. The findings were that Inflation, Interest Rates, Company’s Asset Tangibility as well as the Size are positively correlated to the Debt to Equity Ratio. This was also similar in regards to Savings to GDP Ratio and Stock market Development. On the other hand, Exchange Rate, GDP and Foreign Direct investment had a negative effect on the Debt to Equity Ratio. The results of this study provided evidence regarding how changes in macroeconomic factors such as inflation rate, interest rate, exchange rate, S/GDP, Size, FD and foreign investment shift decisions regarding capital formation among non-financial firms listed at the NSE.