Relationship Between Capital Structure and Financial Reserves of Listed Firms in Kenya

Abstract

Most companies trading on the NSE do not have sufficient cash on hand to meet their immediate liquidity needs. Furthermore, more than 60% of the capital for listed companies comes from equity. The purpose of this research was to determine whether and how capital structure affects the financial security of Kenya's publicly traded companies. Three theories of capital structure served as the basis for this study. Some of the topics were philosophies of agency, hierarchy, and compromise. This investigation adopted a correlational survey2design targeting 42 listed firms in Kenya between 2017 and 2021. This study utilized secondary data collected in annual reports mined from NSE website using a data collection schedule. This study adopted use of descriptive and inferential statistics (regression and correlation) using SPSS 17. For the purpose of this investigation, diagnostic tests such as the normalcy test, the homoscedasticity test, and the multicollinearity test were carried out. This study used F-statistics for significance2of the analytical model. Capital structure showed a negative significant effect on financial reserves. Capital structure showed a positive but insignificant relation with liquidity. Capital structure further showed weak negative insignificant relationship with firm size. Further, capital structure showed a weak negative but insignificant relationship with firm profitability. The study concludes that capital structure has a negative relationship with financial reserves of listed firms in Kenya. The study also concludes that liquidity, firm size and firm profitability have a positive relationship with financial reserves of listed firms in Kenya. The study recommends that listed firms in Kenya reduce their debt to asset ratios for them to increase their financial reserves. The listed firms in Kenya also need to increase their asset levels for increased financial reserves and increase their net income through reduced costs and expenses. There is need for future studies to be done on other periods other than 5 years as it is for the present research paper. This may be done on a longer period like 10 years. There is need to look at other factors influencing financial reserves of listed firms in Kenya. Future studies should adopt different measures of capital structure and financial reserves. Other studies can adopt primary data for similar study. Future studies can undertake a similar study on non-listed firms. Specific sectors of the listed firms can also be considered in future studies.