Effects of Change in Capital Structure on Performance of Companies Quoted in Nairobi Stock Exchange
Abstract
Restrictions on the capital structure of a public company may harm the company's
performance by preventing owners [from choosing the best capital structure. Many theoretical
and empirical analyses have also dealt with change in capital structure and its effect on firm
performances. Capital structure change has always been one of the main topics among the
studies of many scholars. Its importance derives from the fact that capital structure is tightly
related to the ability of firms to fulfil the needs of various stakeholders. The last century has
witnessed a continuous developing of new theories on the issue of change of capital structure
and its effect on performance. The objective of the study was to address the effect of change
in capital structure on performance in companies listed in Nairobi Stock Exchange.
This was a descriptive study that utilized a descriptive survey approach on the 45 companies
that had traded at NSE consistently from 2003 to 2007. The use of secondary data sources
used in the study was obtained from published reports of quoted companies. Both
quantitative analysis and inferential analysis was used as data analysis technique whereby the
OLS regression model was used.
The study findings showed that there was significantly positive relationship between SDA
and profitability since short-term debt tends to be less expensive and increasing it with a
relatively low interest rate will lead to an increase in profit levels and hence performance.
The study further concluded that profitability increases with the control variables, that is, size
and sales growth. The study recommended that owing to the less cost incurred in obtaining
short term loans than long term ones, companies should go for short term loans.
Citation
MBASponsorhip
University of NairobiPublisher
University of Nairobi School of Business, College of Humanities and Social Sciences