An empirical analysis of macro-economic influences on corporate capital structure of listed companies in Kenya

Abstract

Capital structure is an important aspect of financial management. For maximization of the value of the firm, the management tries to arrive at a proper mixture of debt and equity, which is not an easy task to do. Different factors have been considered in different models to get an optimum capital structure. Economic factors, among them play a leading role in the determination of the capital structure of a company. The influence of micro economic factors has been highlighted by various scholars, but the influence of macro economic factors in the determination of capital structure is somewhat under-researched in the finance literature. This study, attempted to analyze the influence of the macro economic factors on the capital structure of some selected companies in Kenya. The objective of the study was to determine the magnitude and the direction of the relationship between selected macroeconomic variables on corporate capital structure of listed companies in Kenya. The study took both analytical and descriptive research design, on a target population of all firms listed at the Nairobi Stock Exchange for the period between January 2004 and December 2008 which were 39 in number. The study used secondary data sources from the companies’ books of accounts and financial report and the macro-economic data from the Central Bureau of Statistics and Central Bank of Kenya. The study used econometric models of multiple linear regressions where leverage (debt ratios) was regressed against GDP growth rate, inflation, ratio of and interest rate. The results of the study revealed that the influence of some macro economic factors upon the capital structure of the companies is pronounced. The study found out that macro-economic factors like GDP growth rate has a positive influence on long term debt ratio and a negative influence on total debt ratio and short term debt ratio, inflation only has a negative influence on the short debts of the Kenyan listed companies and interest rate as measured by the treasury bills has a positive influence on the long term debt ratio and total debt ratio and a negative influence on the short term debt ratio.