Determinants of debt financing for firms listed at the Nairobi securities exchange

Abstract

Debt is one of the commonest methods of financing in most companies listed at the Nairobi Securities Exchange (NSE). In fact, a large number of firms, more than 50 percent, listed at the NSE use debt financing. A growing body of literature suggests that profitability, firm size, and growth opportunities are some of the major determinants of debt financing. Against this background, the current study explores the main factors that inform the decision to use debt financing for firms listed at the NSE. Using a sample of 30 listed companies and panel data analysis, the researcher examined whether the three independent variables explain the widespread use of debt financing in the Kenyan context. In particular, the Hausman test indicated that there are random variations between the variables; as a result, the researcher adopted the random effect model. In addition, a control variable, corporation risk, helped the researcher reduce the impact of confounding variables. The results indicated that profitability is the only determinant of debt financing. This was in line with the pecking order theory that predicts an insignificant inverse relationship between profitability and debt financing. The researcher suggests that future research should explore other variables, such as non-debt tax shields, institutional shareholding, and interest rate.