Effects Of Capital Structure On Liquidity Of Commercial And Service Firms Listed In Nairobi Securities Exchange

Abstract

Despite some commercial and service firms in Kenya experiencing favourable liquidity ratios, majority of the firms continue to display poor liquidity ratios. The study seeks to assess effect of capital structure on liquidity of commercial and services firms listed in Nairobi Securities Exchange. The study used descriptive research design. The study utilized the data of 8 firms categorized as commercial and service companies listed in Nairobi Securities Exchange between 2009 to 2018. The researcher examined secondary data to establish the effect of capital structure as measured by debt, shareholder capital and retained earnings on liquidity. Liquidity was measured through the current and quick ratios. The data was collected from NSE reports and individual firm reports. In this study both multiple regression panel data and descriptive analysis was done. From the regression analysis, a unit rise in the debt ratio was found to decrease the current ratio as shown by the negative regression coefficient. The effect was found to be strong as shown by a regression coefficient above 0.5. However, a unit rise in the debt ratio was found to increase the quick ratio. However, debt showed a lower absolute coefficient with quick ratio. The study found that increase in shareholders capital ratio would increase current ratio within the period. On the other hand, increase in shareholders capital ratio would increase quick ratio by a lower proportion compared to the current ratio. Retained earnings ratio showed a positive regression coefficient below 0.5 against current ratio. Increase in retained earnings ratio was also found to lead to increase in quick ratio by a small proportion. The findings showed that increase in firm size would increase the current ratio and quick ratio of the firms. The study concludes that debt, shareholders capital, retained earnings and firm size are the main determinants of the liquidity of listed commercial and service firms in Kenya. The study concludes that shareholders capital, retained earnings and firm size have a positive effect on the liquidity of listed commercial and service firms in Kenya. The study recommends that commercial and service firms should maintain an optimal level of debt in order to avoid liquidity issues in their firms. The listed commercial and service firms, in order to improve their liquidity ratios, should bring in more shareholders into the firms which would increase the level of shareholders capital in the firm. Listed commercial and service firms in Kenya retain more profits in order to improve their liquidity ratios.