What Determine Corporate Capital Structure in Developing Economies? Evidence from East African Stock Markets

Abstract

The purpose of this study is to determine what factors are statistically significant influencing the corporate capital structure in East African stock markets. The study used panel dataset of 240 observations including 30 non-financial companies listed in East African stock markets such as Dar Es Salaam Stock Market (DSE), Nairobi Securities Exchange (NSE) and Uganda Securities Exchange (USE) for a period of 8 years (2006-2013).Using the Panel Corrected Standard Errors (PCSEs), the study formulated three (3) regression models for long term debt, short term debt and total debt as dependent variables for model 1, model 2 and model 3 respectively. The results shows that all independent variables used in the models (profitability, size of the firm, tangibility of firm assets, liquidity and non-debt tax shield) were statistically significant influencing corporate capital structure except non debt tax shield which proves to be statistically insignificant for short term debt. The study found that trade off theory and pecking order theory were applied in corporate capital structure decisions for the East Africa companies. Lastly the study recommends to financial managers to consider these determinants as yardstick in their capital structure decisions, regulatory authorities in East Africa stock Market such as East African securities regulatory authority (EASRA) to formulate policies relating to securities markets by taking into consideration these findings and also  to researchers to conduct future researches after incorporating other variables like corporate governance structure, financial flexibility, credit rating etc. and to include other capital structure theories like agency theory which were not considered in this study.

Keywords: Capital Structure, Panel Data, Developing Economies, East African Stock Markets