Effect of Capital Structure on Cash Holdings Among Commercial and Services Firms Listed at Nairobi Securities Exchange

Abstract

The study aimed at establishing the connection between capital structure on cash holdings of commercial and services companies quoted at the NSE. This study used financial capital structure as the independent variable while a cash holding was used as the dependent variable. Firm size, profitability, and liquidity were used a control variables. The study targeted 11 commercial and services companies quoted at the NSE but obtained competed data from 10 quoted non-financial firms. The 10 firms generated a response rate of 91%, which was deemed sufficient to continue with the study. Various diagnostic tests such as the tests of normality, autocorrelation and multicollinearity tests were carried out. This research was founded upon three main capital structure theories which include; Agency theory, Pecking order theory and trade-off theory. Correlation analysis showed that debt equity ratio (r=0.137, p=0.344) had a positive but insignificant correlation with cash holdings. Size (r=-0.040, p=0.781) had a positive and insignificant correlation with cash holdings. Liquidity (r=-0.035, p=0.811) was negatively correlated with cash holdings. Profitability (r=-0.101, p=0.486) also had a negative but insignificant correlation with cash holdings. The regression summary statistics established that there was a strong linkage connection (R= 0.794) between cash holdings and the predictor variables. The study also established that the variables chosen explain 63.1% of the total variance in the cash ratio of commercial and services firms listed in Kenya. The ANOVA analysis exhibit that the regression model, is good predictor between dependent variable and independent variable. The coefficient results indicated that the association among debt ratio and cash holdings is positive but insignificant. The results also show that the connection between firm size and cash holdings is positive and significant. Finally, the results show that the connection among firm liquidity, profitability and cash holdings is negative but only firm liquidity is significant.