The effect of capital structure on the corporate governance of companies listed at the Nairobi Securities Exchange
Corporate governance is concerned with the way that power is exercised over corporate entities. Capital structure refers to the combination of debt and equity capital that a firm uses to finance its long-term operations. The capital structure choice of the firms becomes important factor in corporate governance practices. The relation between capital structure and corporate governance becomes extremely important when considering its fundamental role in value generation and distribution. The objective of this study was to investigate the effect of capital structure on corporate governance of firms listed at the Nairobi security exchange. The study employed descriptive survey design with the population of the study being 51 companies listed on the NSE.The sample size for this study was made up of 35 listed companies excluding the financial, investment and insurance companies due to their peculiar nature of capital structure.The study used secondary data from annual reports of the quoted companies over a period of five years. The data was analyzed through the use of Statistical Package for Social Sciences (SPSS). Results from the study indicate that most firms in the NSE use more debt or long term liability as a source of financing than equity capital from shareholders. ANOVA statistics presented showed that the overall model was statistically significant as this was supported by an F statistic of 3.4 and a probability (p) value of 0.021. Regression of coefficients results showed that there was a positive relationship between corporate governance and capital structure, size of the firm, liquidity and firm opportunity whose beta coefficients are 0.072, 0.000, 0.215 and 0.933 respectively. Statistically significant variables in the study were capital structure, size of the firm and opportunity of the firm as they had p values of 0.000, 0.008 and 0.034 which is lower than the probability conventional of 0.05. These findings show thatcompanies in the NSE have good return on assets and have the ability to meet their short term obligations when they fall due. Further, most firms in the NSE use more debt or long term liability as a source of financing than equity capital from shareholders. This study adds on to theory because it tests the reverse relationship between capital structure and corporate governance.