Effect of Corporate Governance on Capital Structure of Non-financial Firms Listed in Nairobi Securities Exchange

Abstract

Adoption of appropriate corporate governance by a firm will give guidance to the managers on the different levels of debt and equity financing that they will employ and what sequence to follow in raising the capital. The study sought to determine the effect of corporate governance practices on capital structure of listed non-financial firms in Kenya. The independent variables for the study were board size, board structure, board diversity, and firm liquidity Capital structure was measured using debt to equity ratio while corporate governance was measured using board size, board diversity, and board structure. Firm liquidity was measured liquidity ratio. The study adopted a descriptive research design. It adopted descriptive research design. The population consisted of all 40 non-financial firms registered at the NSE. Out of the total population only 37 firm’s data was fully available. The study used quantifiable secondary data which was analysed using descriptive and inferential statistics to analyze on SPSS version 22. The data sources included all NSE hand books and company’s annual reports for the study period was from year 2013 to year 2017. From correlation analysis the study established that there was a positive and statistically significant correlation between board diversity (r = .146, p = .047 and capital structure. Negative and insignificant correlation was noted between board size (r =.-073, p = .325), board structure (r =.-046, p = .536) and capital structure. Also there was a negative and significant relationship was noted between firm liquidity (r = -0.277, p = .000 and capital structure. The research study concludes that the corporate governance as measured by the selected practices has a significant influence on the capital structure measured by debt ratio of non-financial companies quoted at NSE. This is denoted by the negative correlation between the board size, board structure and the capital structure.