The Relationship Between Managerial Discretion and the Capital Structure of Firms Listed at the Nairobi Securities Exchange

Abstract

Managerial discretion has attracted a lot of attention in the recent past and various studies have been forwarded to support the argument that indeed a manager‟s discretion affects the long term financing decisions of a firm. A manager considered to have high discretion is believed to issue more equity than debt and repurchase more debt than equity thus giving high discretion firms a conservative capital structure. The study therefore aimed at establishing the relationship between a manager‟s discretion and the choice of either equity or debt as a means of financing. The literature offers empirical evidence from business data in support of this hypothesis. The study used descriptive research design. The population of interest was 47 companies listed at the Nairobi Securities Exchange. The primary data was collected by use of a questionnaire which was circulated to the companies through pick and drop method. The secondary data was obtained from the financial statements of the listed companies. Linear regression method was used to analyze the collected data. The study established that managerial discretion is indeed an important factor when it comes to long term financing decisions. It established that managers with high discretion tended to issue more equity than debt. There is strong evidence that managerial discretion does influence the capital structure of firms. Care should be taken in regard to managers with high discretion as there is a thin line between making financing decisions to achieve lower debt ratios and to invest beyond their firms' growth potential. Some high discretion managers can use these decisions to build empires of their own and thus need for regulation of issuance of debt and equity regardless of levels of discretion.