Determinants Of the Capital Structure of Companies Listed on The Nairobi Securities Exchange

Abstract

The increasing trend of abrupt corporate failures both locally and globally are incensing growing concern among shareholders and other stakeholders alike. This has made these stakeholders to question the performance of their firms. Capital structure is arguably the core of modern corporate finance. This study sought to examine the determinants of capital structure of firms listed on the NSE. While the specific objectives were: To determine the effect of profitability on capital structure for companies listed in NSE, to establish the effect of growth opportunity on capital structure for companies listed in NSE, to establish the effect of firm size on capital structure for companies listed in NSE, to evaluate the effect of firm age on capital structure for companies listed in NSE, and to evaluate the effect of asset tangibility on capital structure for companies listed in NSE. The study reviewed trade off, pecking order and Modigliani and Miller theories that underpinned the study. Longitudinal research design was used. The study was a census study of all the firms listed in the NSE between 2003 and 2013. Secondary data from certified financial records of the firms was extracted and both descriptive and inferential statistics used. The data was both cross sectional and time series in nature and therefore panel data model was used. The study results established that firm profitability, growth opportunity, firm size, firm age and asset tangibility all had no significant effect on total debt of firms listed in NSE in Kenya. In regard to equity levels, the study established that profitability and asset tangibility have a significant effect on equity to total assets ratio. However, the study reveals that that firm size, firm age and growth opportunity have no significant influence on equity to assets ratio. From the study results, recommendations were made to managers of firms to observe present and future profitability of their firms as it is deemed as a major determining factor in capital structure and hence in determining the cost of capital and value of the firm. Further managers should also ensure that they effectively manage their assets to enable the firm’s assets to remain of high quality so as to contribute in the firm’s earning power.