The variability of returns caused by the level of debt in capital structure (leverage) in public companies in Kenya
Abdullahi, Issack Ali
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That returns to common stockholders vary as a result of the portion of debt a company is carrying in its capital structure is of immense interest to financial scholars. In Kenya little has been done to ascertain the nature of this relationship as a result a research gap exists. Using data from 31 quoted companies for a period of 9 years, this research seeks to determine the relationship between the use of debt in the capital structure of a firm and the variability of returns to common stock. Data was collected in form of stock prices, dividends paid, debt amounts, interest on debt and annual tax paid. This data was transformed into levered and unlevered returns based on MM theory. Mean levered returns and mean unlevered returns was computed for each set of returns and result compared. To determine the degree of relationship between the chosen variables a test of significance was performed which pointed to a relevant conclusion. The results of this study differs sharply with the commonly held view that leverage increases the risk to common stock holders as a result of fixed interest charges that the firm will be committed to. This study holds that, while this theory holds true for developed markets, it may not hold for developing and emerging markets. It's apparent that existence of debt in capital structure does not lead to increase in the variability of returns to common stock holders for companies quoted on Nairobi Stock Exchange.