Capital Structure Choice: an Empirical Testing of the Pecking Order Theory Among Firms Quoted on the Nairobi Stock Exchange

Abstract

This study uses shy am-sunder and Myers (1999) POT model, to test whether firms listed on NSE follow the pecking order theory of capital structure in their financing choices. The POT model predicts external debt financing driven by the internal financing deficit. The study used 31 firms listed on NSE for the period between 1998 and 2003. A graph (fig.l) on average debt to total net assets and average financing deficit to total net assets has indicated no relationship between the two variables. Contrary, to POT model prediction, that is, if firms follow pecking order theory of capital structure then regression of net debt issues on financing deficit should observe a slope coefficient of one; NSE has indicated a slope of .056. The R-squared =.0162 which means that financing deficit only determines 1.62% of the variation in amount of new debt borrowed. The other percentage, that is, 98.36% is determined by other factors. On conclusion. NSE firms do not follow the pecking theory of capital structure in there financing choices. There is therefore, a need to test other theories explaining financing choices in an attempt to determine the one applicable to NSE firms.