Capital structure and its determinants at the Nairobi Securities Exchange
Magara, Marcella Nyabwari
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Businesses are living in a world of stiff competition. To be vigorous in this competition, cost effective mix of capital is an important and companies need to investigate more on the determinants of capital mix. A number of capital structure theories have been proposed in the recent years to explain the variation in debt ratios across firms. Capital structure theory suggests that firms determine what is often referred to as a target debt ratio; which is based on various trade-off between the costs and benefits of debt versus equity. This study seeks to establish the determinants of capital structure of listed companies at the Nairobi Securities Exchange (NSE). In this paper, an attempt has been made to examine the determinants of capital structure –age of firm, size of firm, tangibility, liquidity, business risk, growth rate and profitability as independent variables and the degree of leverage of the companies listed at the NSE from the period 2007-2011. The study used a casual research design to investigate the cause effect relationship between the independent (determinants) and the dependent (leverage) variables. The population consisted of the companies listed at the NSE by the end of December 2011. The study used a purposive sampling technique by selecting companies that have continuously traded at the NSE for the five year period from 2007-2011. Data used for the study was purely secondary data collected from the audited annual financial statements of the selected companies for the five year period. The data then was processed using the statistical package SPSS. The collected data then was analyzed using descriptive statistics, ANOVA and OLS regression. The results of this study have delivered some insights on the capital structure of Kenyan companies listed at the NSE. The issue of capital structure is an important strategic financing decision that firms have to make. It is therefore important for policy to be directed at improving the information environment. The simple and multiple regression test were used to analysis the determinants of capital structure independent variables and leverage. The multiple regression test results indicate from the period 2007 to 2011, there is a positive significant relationship between the firm size, tangibility and growth rate and the degree of leverage at different significant levels of 1% and 5%. But there is a negative significant relationship between profitability and leverage at a significant level of 5%. Also the model is significant as overall variables independent variables and leverage at highly significant at the level of 1%. Finally, the results show there is no significant relationship between the number of age firm, assets liability and business risk as independent variables and degree of leverage. The study provides useful recommendations for policy direction and management of the companies listed at the NSE through emphasis on the facilitation of equity capital since it provides a base for further borrowing, reduces businesses’ sensitivity to economic cycles. There could also be policies intended to encourage establishing financing schemes to assist companies in specific industries. There is a need to develop validated databases as more data becomes available in future. Using such databases can help in examining and identifying additional variables that could influence the financing behavior of Kenyan companies listed at the NSE. Finally, focus should be placed on the ownership structure of Kenyan companies listed at the NSE to examine how firms make their financing decisions.