Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence from the Nairobi Stock Exchange
Abstract
The main objective of the study was to establish the relationship between the
Debt-equity ratio and the expected common stock returns while controlling for
beta and size of the firm. Similar studies have been carried out in developed
markets (Bhandari, 1988) that have a confirmed that a statistically significant
positive relationship exists between the debt-equity ratio and the expected
common stock returns.
The dependent variable in the study was the expected common stock returns
while the independent variables were the firm size, beta the risk measure and the
debt-equity ratio. The main objective was to determine whether the debt-equity
ratio is positive.
Secondary data comprising of stock prices, dividends, financial statements of the
listed companies and the Nairobi stock exchange monthly 20 share index was
obtained from Nairobi Stock exchange and analyzed using linear multiple
regression for a period of 10 years, 1998 to 2007.
The results were inconclusive therefore there was no relationship that was found
to exist between the expected common stock returns and the debt-equity ratio in
the Kenyan market.
In the Kenyan capital market, the debt-equity ratio of a firm is probably not a
major factor to consider when making investment decisions on common stock
securities. The government could consider various incentives in order to
encourage firms to make use of debt financing in their operations.
Citation
Karani, 2009Sponsorhip
University of NairobiPublisher
School of Business
Description
MBA - Thesis