Effects of Board Structure and Market Segment on Capital Structure of Firms Listed in the Nairobi Securities Exchange

Abstract

This study’s objective was to determine the effect of board structure and market segment on the capital structure of firms listed in the Nairobi Securities Exchange. Capital structure is the mix of debt to equity firms use to finance their operations, while board structure refers to the board’s internal organisation and influences strategies used by firms. One of the strategies firms consider in maximising shareholder wealth is the firm’s optimal capital structure. In Kenya, the NSE has classified firms listed on the exchange into four equity market segments; Main Investment Market Segment (MIMS), Alternative Investment Market Segment (AIMS), Growth and Enterprise Market Segment (GEMS) and Real Estate Investment Trusts (REITs). The study showed that board structure and market segment affect firms’ capital structure of the listed firms at the NSE in the MIMS and AIMS market segments. The GEMS and REITs market segments were dropped as they did not meet the necessary number of observations threshold. Using secondary data, a multiple linear regression model was used to determine the relationship for the listed firms from 2015 to 2019. The results showed that board structure and market segments could explain a 76.78% variance in capital structure. An F-test was carried out for the regression model, and the null hypothesis was not rejected as the test statistic did not exceed the critical F-value set at the 5% level. Further, the study showed that an increase in the board size and women and independent directors’ representation was shown to reduce leverage. A reduction in leverage reduces the perceived risk in the firm and improves capital structure in both the MIMS and AIMS market segments. The study results showed that firms in the AIMS market segment lag behind those in the MIMS market segment regarding the number of board members, women and independent directors representation. As the results showed, these factors would reduce the firms’ leverage. Firms in the AIMS market segment need to relook at their board structures to enhance their capital structure. However, firms trying to determine their optimal capital structures need to consider other factors such as profitability, firm size, growth, non-debt tax shields, earnings volatility and tangibility. The study has shown that, in conjunction with board structure, they affect the capital structure for firms in both the MIMS and AIMS market segments and should not be ignored.