Capital Structure, Firm Efficiency and Firm Value: The Case of Listed Non-Financial Firms in Kenya

Abstract

This study examined the influence of a firm’s efficiency on the relationship between capital structure and firm value. The study analyzed thirty non – financial firms listed at the Nairobi Securities Exchange for a period of six years from   2008 to 2013.Capital structure was parameterized as the ratio of retained earnings to total capital, ratio of debt to total capital and ratio of equity to total capital of the firm. Efficiency is measured as the distance from the best practice frontier in the industry. The firm’s efficiency is measured by operational efficiency, cost efficiency and profit efficiency. Firm value is measured by its inputs and outputs. The inputs to the firms production are financing costs (FINC), distribution costs (DISTC), tax liability (TAX), and administrative expenses (ADEXP). The outputs are earnings per share(EPS)and the share price (SP).This study applied panel data analysis using fixed effects model. The results showed that cost efficiency negatively influences the relationship between capital structure and firm value as measured by the SP through increase in distribution costs, administrative costs in financing efficiency improvements in the firm’s core processes. Further Operating efficiency negatively and statistically significantly affects the relationship between firm value and capital structure through the increase in financing costs, distribution costs, administration costs and taxation costs. The results showed that profit efficiency negatively and insignificantly influences the relationship between capital structure and firm value as measured by the SP. Consequently it has a positive but statistically insignificant effect on financing costs, distribution costs, administrative costs and taxation costs. Moreover, capital structure has a positive and statistically significant effect on firm value but firm efficiency insignificantly influences the relationship between capital structure and firm value. This study does not investigate the reverse relationship like Margaritis and Psillaki (2007).

Keywords: Capital Structure, Firm Efficiency, Firm Value, Listed Non-Financial Firms, Nairobi Securities Exchange