Capital Structure of Kenyan Firms: What determines it?

Abstract

The study sought to find what determines the capital structures of publicly quoted firms, unquoted firms and the small and medium enterprises (SMEs). More specifically, the study aimed to assess whether the size of the firm (FS), asset growth of the firm (AG), profitability (PR), liquidity (LQ), cost of debt (CD), risk of the business (BR) and the industry type (IN) were crucial in influencing the capital structure decisions of Kenya firms. The study employed descriptive design.  Stratified sampling technique was used to select 200 firms which included 22 quoted firms, 25 unquoted firms and 153 SMEs. The data for the empirical analysis were derived from the financial statements of these firms during the period 2000–2010. Information on the heterodox factors was obtained through a questionnaire survey. The field survey was carried out between June and July 2012.  Statistical package “STATA/IC 10” was used to analyze the data and a panel regression model was used for analysis of data.  Wald goodness-of-fit test statistics was carried out. Correlation analysis and ANOVA test were carried out.  It was found that only 36% of the variations in the debt-equity ratio could be explained by the variations in the explanatory variables of the model. On the other hand, the adjusted  R²s  of  the  individual  regressions  fitted  in  each  of  the  five  industries  separately  have  ranged from  about  50%  to  over  80%,  indicating  a  relatively  high  explanatory  power.  The size of the firm (FS), asset growth of the firm (AG), profitability (PR), liquidity (LQ), cost of debt (CD) were concluded to have positive effect on the capital structure of a firm.  On the other hand, risk of the business (BR) and the industry type (IN) were not very strongly correlated to the capital structure of the firm as revealed by the study.  Modified Pecking Order theory was confirmed by the study.

Key words:Corporate leverage, Cost of equity, Financial distress, Pecking order, Trade-off theory.