Capital Structure Choice: an Empirical Testing of the Pecking Order Theory Among Firms Quoted on the Nairobi Stock Exchange
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Date
2005-08Author
Gachoki, Kennedy M
Type
ThesisLanguage
enMetadata
Show full item recordAbstract
This study uses shy am-sunder and Myers (1999) POT model, to test whether firms listed on
NSE follow the pecking order theory of capital structure in their financing choices. The POT
model predicts external debt financing driven by the internal financing deficit. The study
used 31 firms listed on NSE for the period between 1998 and 2003.
A graph (fig.l) on average debt to total net assets and average financing deficit to total net
assets has indicated no relationship between the two variables. Contrary, to POT model
prediction, that is, if firms follow pecking order theory of capital structure then regression of
net debt issues on financing deficit should observe a slope coefficient of one; NSE has
indicated a slope of .056. The R-squared =.0162 which means that financing deficit only
determines 1.62% of the variation in amount of new debt borrowed. The other percentage,
that is, 98.36% is determined by other factors.
On conclusion. NSE firms do not follow the pecking theory of capital structure in there
financing choices. There is therefore, a need to test other theories explaining financing
choices in an attempt to determine the one applicable to NSE firms.
Citation
Masters Of Business Administration (MBA) Degree, University of NairobiPublisher
University of Nairobi School of Business
Description
A management research project in partial fulfillment of the
requirements for the Degree Of Masters Of Business
Administration (MBA), faculty of commerce, University of
Nairobi