Long-run Relationship Between Macroeconomic Factors and Private Sector Corporate Debt

Abstract

Industries in the private sector are key drivers of growth in an economy. Through creation of employment and production of goods and services, these industries contribute greatly to growth of the gross domestic product. However, these industries require sufficient funds for their operations. Funds are raised through various channels which include debt, equity, and retained earnings. A firm’s level of corporate debt is usually determined by various market factors, among them being macroeconomic factors. This study determined the long run relationship between macroeconomic factors and private sector corporate debt. Time series data on private sector corporate debt, interest rate, gross domestic product growth rate, growth rate of public investment and foreign direct investment growth rate in Kenya from the year 1970 to 2020 was used. The model was specified through autoregressive distributed lag model. It Was established that public investment growth and foreign direct investment had a negative and significant effect on private corporate debt as predicted. Moreover, growth in GDPshowed a negative and significant effect on private corporate debt similar to the findings by Chebet (2017) while exploring the macroeconomic factors influencing credit demand by the Kenyan private sector. Furthermore, the study established an adverse significant impact between interest rates and private corporate debt. Therefore, the study recommends that the government should balance on public investment to combat rise in private corporate debt arising from increased borrowing to fund public utilities. It should also set up policies that encourage foreign investment and economic growth.This will result to improved capital holdings and investment capacity in different sectors. Lastly, the government can apply monetary policies to achieve the desired levels of corporate debt that would protect firms from risks associated with debt financing.