Relationship Between Microeconomic Characteristics and Leverage Among Companies Listed in East Africa Securities Exchanges

Abstract

Leverage levels ought to be continuously monitored in any corporate since an uptake of huge amount of debts may trigger possibilities of financial distress especially if the debt is not serviced on time. There are costs associated with the amount of debt and if poorly constituted then there are chances of incurring huge financing costs. The current study was triggered on the need to understand whether profitability, firm size and asset structure have significant influence on leverage ratio among companies listed in East Africa. The study was informed by pecking order theory and Modigliani and Miller theory. The study adopted panel-correlation research design. A panel data set of 65 listed companies over the 2009-2013 period of analysis was analysed using panel data analysis methods. Results of the study showed profitability had a negative and significant influence on leverage while both firm size and asset structures had positive and significant influence on leverage. The study recommends that measures should be put in place to increase profit levels and increase listed company’s asset base. Business operations should be intensified and debt levels to be closely monitored to mitigate the possibilities of financial distress.

Keywords: Leverage, Profitability, Firm Size and Asset structure.