An empirical analysis of the relationship between capital structure and stock returs for quoted companies: evidence from the Nairobi Stock Exchange
Menza, M K
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This project sought to conduct an empirical study that tests the relationship between capital structure and stock returns for companies listed at the Nairobi Stock Exchange for the period 2001 to 2008. I investigated this relationship by first undertaking a linearity test, of mean excess returns and the capital structure of a firm using the Sivaprasad and Muradoglu (2007) methodology with slight modifications. I employed the Actual Debt Ratio (ADR) oflvo Welch (2004) as the measure of capital structure instead of the leverage ratio of Sivaprasad and Muradoglu (2007). Secondly, I undertook a portfolio level analysis of the mean excess returns and the firm's ADR using the FamaFrench (1992, 1993) models. The findings of this paper could not confirm whether stock returns react to ADR hence cannot be said to be consistent with the findings of MillerModigliani and other published papers done in developed economies such as the United States of America and United Kingdom, in which stock returns were found to increase with leverage. The linearity tests failed to establish a linear relationship between excess returns and the actual debt ratios. The Fama-French (1992, 1993) models, on the other hand did show a moderate linear relationship with the market risk premium being the dominant influencing factor. Key words: Capital Structure, Stock Returns, Actual Debt Ratio .
University of Nairobi, Kenya