The Effect of Capital Structure on Value of Firms Listed on the Nairobi Securities Exchange

Abstract

The foundation of this research was to establish the connection between capital structure and the influence it carries on the value of firms that are listed at the Nairobi Securities Exchange. While many factors can influence a performance, capital structure was fundamental. This study has been supported by three key theories that reveal the motives for various capital structure decisions that firms make. The first one was the trade-off theory, which posits that there is ideal degree of structure of capital in which a firm’s esteem is augmented. The second one was the theory of pecking order which notes that there is an uneven data issue amongst directors and financial specialists. The last one was the agency theory. Here, managers are inclined to extend the size of their organizations, regardless of the possibility that that conduct implies undertaking poor activities or decreasing firm esteem. In this research, the value of the firm was anticipated to be influenced by four independent variables: structure of capital, the size of the firm, age of the firm and asset tangibility. The study employed descriptive form of design as it sought to understand the impact of structure of capital on the value of listed firms in Kenya. The focus was on 40 non-financial firms at the NSE and secondary quantitative data was used. This was obtained by abstraction method from financial statements for the 40 companies covered as they are published by NSE. This data covered the period from 1st January 2013 to 31st December 2017. In this research, descriptive examination was used to carry out analysis of data. The study also used inferential statistics such as regression analysis to analyse the data. This being a continuous secondary data, the diagnostic tests on the data were few given the reliability and the nature of data. The research indicated that short-term debt to equity had a big role in enhancing performance of companies listed in securities exchange. The study recommended that a business friendly environment is a prerequisite for increased firm performance. From this study, it can be argued that performance of a listed business was also affected by exchange rate and inflation. As such, the government needs to put into consideration the growth of the economy as a measure to tame inflation. Also other companies should be encouraged to list. Stock Markets and Capital Markets Authorities need to foster awareness of merits of businesses getting listed as opposed to borrowing.