Do Profitability, Firm Size and Liquidity Affect Capital Structure? Evidence from Kenyan Listed Firms

Abstract

This paper was aimed at determining the effect of profitability, firm size and liquidity on capital structure. The study adopted panel data from financial statements of 34 firms listed in Narobi Securities Exchange for a period of years (2006-2012) excluding commercial banks. Pearson Correlation was employed to test linear relationship between the variables while multiple regression model were used to test the hypothesis. Findings obtained indicated that that profitability and liquidity are negatively and significantly related to capital structure. However, firm size is positively correlated and not significant on capital structure. Therefore, since the capital structure decision is a significant managerial decision which influences the shareholder’s return, risk and the market value of the share, a company has to undertake profitability and liquidity decision whenever funds have to be raised to finance investments.

Key Words: Capital Structure, Liquidity and Profitability