Effect of Capital Structure on Equity Risk Premium of Listed Commercial Banks in Kenya

Abstract

Where the capital structure has a higher composition of equity, a firm experiences low market risk which leads to a lower equity risk premium. Commercial banks in Kenya have experienced high fluctuations in their capital structures with a reduction in average equity risk premium among the listed banks in Kenya. This survey assesses the effect of1capital structure on equity risk premium of listed commercial4banks in Kenya. This survey utilized correlational, descriptive and longitudinal2research designs. The population of the study comprised the twelve banks that were listed on Kenya’s Nairobi Securities Exchange (NSE) between 2017 and 2021. The researcher collected2secondary data mined from2annual reports2of the banks sourced from the Central Bank of Kenya (CBK). The researcher gathered data using a collection sheet. This study used both2descriptive and inferential statistics2for analysis. The researcher used F statistics to conduct significance tests. From the regression coefficients, a unitary increment in capital structure would increase the equity risk premium of listed commercial4banks. This survey concludes that capital structure possesses a direct bearing on equity risk premium of listed commercial4banks in Kenya. However, an increment in capital adequacy had no substantial negative effect on the equity risk premium. The study concludes that capital adequacy possesses no substantial influence on equity risk premium among listed commercial4banks in Kenya. Asset quality showed insignificant positive coefficient hence no substantial influence on equity risk premium. This survey concludes that asset quality of listed commercial4banks in Kenya has no substantial effect on their equity risk premium. The outcomes also depicted that liquidity possessed an inverse link with equity risk premium. This directs the survey to a conclusion that liquidity possesses a positive effect on equity risk premium of listed commercial4banks in Kenya. Management of listed commercial4banks ought to increase equity levels within their banks; optimally reduce their core capital; optimally increase their non-performing loans (NPLs) as compared to the gross loans; and reduce their liquidity levels for increased equity risk premium.