Determinants of Corporate Bond Demand by Listed Firms in the Nairobi Securities Exchange, Kenya
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Date
2025-03
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Kenyatta University
Abstract
When making corporate financing decisions, corporate finance managers ‘options to range from internal sources to external ones. Corporate bond issue is an external financing source that does not dilute ownership rights, has longer maturities and does present bigger pool of investors to raise funds from. However, the bond market in Kenya, both the primary and secondary is over dominated by over treasury bonds according to some studies. The corporate bond market has very low liquidity and turnovers are quite insignificant compared to annual government bonds turnover. According to data from CMA, the yearly frequency of treasury bonds issues is about 10 times that of corporate bonds in Kenya. Observations from the same reports also reveal more equity IPOs than those corporate bonds. In order to unravel the above paradox, this study sought to establish what factors determine corporate bond issuance and how do each of these factors impact on the corporate bond issue size or volume. The general objective of the study was to establish the impact of determinants of corporate bond demand on the issuance of corporate bonds by listed firms on the Nairobi Securities Exchange, Kenya. To achieve the objectives, the study was anchored on the agency theory, liquidity preference theory, market segmentation theory, financial intermediation theory, arbitrage pricing theory, Modigliani-Miller Theory and pecking order theory. The study used a descriptive research design and purposive sampling method with a sample size of 19 corporate bonds drawn from 23 corporate bonds issued between 2014 and 2023. Empirical regression model was used for analysis. The data was subjected to inferential and descriptive analysis. Descriptive analysis included the mean, median, mode, range, standard deviation while the inferential analysis included f-and t-tests. Diagnostics test carried were normality, autocorrelation, heteroscedasticity, and multicollinearity tests. The study put into considerations all the ethical considerations as per the university requirements. The findings reveal that interest rate, government securities, bank loans, and political instability has a negative effect on CB issuance while cash flows, coupon rate and GDP growth rate had a positive relationship with CB issuance. The regressed empirical model (p-value=0.0118) explained 90.04% of the changes in size of CB issued by listed firms. Finally, inflation was found to have a moderating effect on the relationship between independent variables and corporate bond issuance. The study recommends study to evaluate the effect of the role of Central Bank in CB issuance.
Description
A Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of Degree of Master of Science in Finance of Kenyatta University, March 2025.
Supervisors
1. Ambrose Jagongo
2. Fredrick Ndede