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

Abstract

The study sought to investigate 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, board committees, firm profitability and firm size. The study adopted a descriptive cross-sectional research design. The secondary data used was extracted from the audited financial statements of listed non-financial firms in Kenya. The study period was five years (2013-2017). Out of the 40 non-financial firms, the researcher managed to get data for 37 firms. This translated to 92.5% response rate which the research considered an adequate representation of the target population. Using descriptive statistics, correlation analysis and regression analysis, the results of the study were presented in form of tables for easy interpretation. Data was analyzed using SPSS software version 22. The study findings found that there was a positive and statistically significant correlation between board diversity, board committee and capital structure. Also negative and insignificant correlation was noted between board structure, firm profitability and capital structure. Positive and insignificant relationship was noted between board size, firm size and capital structure of listed non-financial firms in Kenya. The study concluded that selected variables significantly affect capital structure as depicted by the p value (0.033) of ANOVA summary. The study also concludes that different practices of corporate governance affect capital structure of listed non-financial firms differently where; Board Size, board committee, board diversity and firm Size influences capital structure positively but only the effect of board diversity and board committee was statistically significant. Board structure and firm profitability influence capital structure negatively. The research therefore recommends that firms should increase the number of women representatives in their boards. The number of committees in the board should also increase to enhance the board overall function in setting optimal capital structure decisions. This study also recommends that firms should enhance their profitability to offset use of a lot of debt in their capital structure because debt comes at a cost to the firm.