Determinants of capital structure of firms listed at the Nairobi securities exchange in Kenya

Abstract

Capital structure is a fundamental aspect of corporate finance that examines on the approaches a firm chooses its source of finances. In making decisions on capital structure, the firm should always gauge its operating environment, both external and internal. The study objective was to investigate the capital structure determinants of listed firms at the Nairobi Security Exchange (NSE) with emphasises of understanding the influence of firm’s specific factors namely; asset tangibility, profitability, firm size, level of risk, growth and corporate tax have on capital structure decision of the listed firms at the NSE from the period 2008 to 2012. The study used causal research design to establish the relationships between independent and dependent variables. Data was derived from audited annual financial statements of the selected companies for the five year period and collected using a document review guide. The collected data then was analyzed using statistical package SPSS. A multiple regression test was done to analysis the capital structure determinants. The multiple regression test results indicated that asset tangibility, firm size, growth opportunities and level of risk positively influences capital structure while profitability and tax advantages of debt negatively influence capital structure at different significant levels of 1% and 5%. Also the overall model was significant meaning that the six independent variables had a significant combined effect on the dependent variable. The study recommends that as a policy, finance managers before designing capital structure of any company, a careful attention should be paid on appropriate features of capital structure and various determinants of capital structure as this will aid in an attempt to predict the possible capital structure of the firm. By doing this well in advance the finance managers eliminate potential problems of illiquidity and potential adverse effects of inadequate capital or over-borrowing can be avoided. Further studies focusing on the company age and industry feature as new variables, differentiating between long term and short term debt in estimation of leverage, extending the data series and also including the macro-economic factors would be carried out.