Relationship Between Capital Structure and Corporate Governance of Companies Listed at the Nairobi Securities Exchange
This paper examines the relationship between capital structure and corporate governance of companies listed at the Nairobi Securities Exchange, Kenya. The population of the study consists of 61 active companies listed at the NSE. A sample of 33 companies whose data for 5 years from 2008-2012 was selected. Analysis was done using multivariate regression in a panel data framework. The result shows that board size is negatively related with debt to equity ratio, the percentage of independent directors is negatively related to capital structure. Government ownership is positively related to capital structure. However, managerial ownership is negatively related to capital structure which indicates that increased managerial ownership align the interest of manager with the interest of outside shareholders and reduces the role of debt as a tool to mitigate the agency problems. The positive relationship between institutional shareholding and debt to equity ratio indicate that firms with larger percentage of institutional shareholding use debt as a tool to reduce agency problem and, are also able to negotiate more debt at a lower cost. It can also be argued that institutional investors enforce good corporate governance structure hence they get better recognition from the debt market. Firms with large percentage of government shareholding are viewed as less risky by the debt providers and in the event of financial distress, they normally have state bail out and therefore they will continue to get more external recognition from debt providers. Firms with larger board size, more independent directors and managerial shareholding have a negative relationship between debts to equity ratio, this is because as the board size, percentage of independent director and managerial shareholding increases, they tend to bring down a firms debt to reduce risk and bankruptcy cost. Therefore it can be expected that listed companies striving to lower their debt to equity ratio can use board size, percentage of independent directors and managerial shareholding as a tool to achieve the objective. The study recommends that future research could also be undertaken on large un-listed companies in Kenya and also on the listed financial institutions so as to understand how corporate governance and capital structure relate to each other in the whole economic set-up.
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