Firm Specific Determinants of the Capital Structure of Manufacturing Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

The contribution of the manufacturing sector towards employment and the growth of the economy of Kenya cannot be underestimated. Presently, the Kenyan government is leveraging this manufacturing sector as a pillar of Big-4 Agenda and Vision 2030. In order for Kenya to be regarded as a globally competitive country, the competitiveness of the manufacturing sector is important. Capital structure decisions are critical for competitiveness of this manufacturing sector in Kenya. The poor financial results reported by some listed manufacturing firms like Mumias raises a lot of question of whether the government would realize the Big-4 Agenda and overall Vision 2030. No country has attained full industrialization without emphasizing the manufacturing sector. The link between firm specific determinants and capital structure of Kenya’s listed manufacturing entities was explored by this inquiry. The study adopted descriptive survey design covering quantitative methods where 9 manufacturing listed firms in Kenya were targeted and census was used. Information was sought from secondary sources and analyzed using means, standard deviations, correlation and regression analysis. The study established that interest tax shield (β=.400, p<0.05 & t>1.96) has the greatest significant contribution towards capital structure of the listed manufacturing firms in Kenya followed by profitability (β=.344, p<0.05 & t>1.96), asset tangibility (β=.257, p<0.05 & t>1.96) and liquidity (β=.217, p<0.05 & t>1.96) respectively. The study concludes that firm specific determinants have significant effect on capital structure. The study recommends that in order to establish optimal capital structures, the finance managers of the listed firms in Kenya should fully leverage the interest tax shield while investing in profitable investments and other fixed assets that can be used as collaterals when borrowing.