Relationship Between Capital Structure And Stock Price Volatility At The Nairobi Securities Exchange

Abstract

Capital structure is important in financial management decision as it influences the value of the firm. Researches done in developed countries have indicated a strong positive correlation between capital structure and value of the firm. This study sought to extend the concept of capital structure relevance by investigating the relationship between capital structure and stock price volatility at firm specific level. Secondary data was collected for all non financial firms trading at the NSE from 2008 to 2012. A sample size of 28 non financial firms is used to conduct a cross section regression analysis and correlation analysis between stock price volatility (dependent variable) and independent variables (debt equity ratio, dividend payment ratio, inflation, money supply, current account deficit and Treasury bill rate). Results indicate that inflation has the largest positive impact on stock price volatility followed by debt equity ratio and then Treasury bill rate with a negative relation though findings were not statistically significant. It is therefore recommended that a study covering a wide period of time be undertaken at firm specific level. Although the findings are not statistically significant, they suggest use of monetary instruments as an effective way in reducing stock price volatility at the NSE.