Impact of profitability on capital structure of companies listed at the Nairobi stock exchange

Abstract

The objective of this study was to ascertain whether there exists a relationship between a firm's profitability and its source of finance. This study was based on secondary data collected on the companies based on Nairobi Stock Exchange. This data covered a period of six years that is January 1999 to December 2004. From this data all the variables relevant to the study were calculated that is values representing the determinants of debt and profit. This data was then analyzed using regression analysis and tested the hypothesis derived from the objective by use of F- significance ANOVA to determine the nature and magnitude of the relationship between the profitability and firm capital structure. The findings of the study confirmed that there is a weak positive relationship between capital structure and profitability of firms quoted on the Nairobi stock exchange from the period 1999-2004. It was also established that firms listed on the Nairobi Stock Exchange during this period relied more on external funding rather than retained earnings.