Relationship between ownership structure and capital structure for companies quoted at the Nairobi Stock Exchange

Abstract

This study examines the relationship between corporate firm's ownership structure and capital structure. The study uses a time series data of publicly listed companies dated from 1998 to 2002 and analyzes firm's financing behavior in connection with ownership structure. The results suggest that capital structure of the companies in the Nairobi Stock Exchange, have an average of 0.078%. The ownership Structure for companies in the Nairobi Stock Exchange is mixed; state, individual, institution, and foreigners. On average the state. holds mainly 4%, individuals 19%, institution 49% and Foreigners 28%. The findings also show that there is negative correlation of Individual, Institution and I Foreign ownership with the capital structure. However, for state ownership there is a strong positive correlation with the capital structure. It is recommended then, tax policies should be reduced and the laws of bankruptcy revised, such that the costs are minimal enough to encourage borrowing. In addition, the findings also indicate that there is a trend to avoid debt for companies without state interests. Suggesting that debt is still avoided as much as MM (1963) hypothesis suggests an increase in value due to tax shield. Therefore, lending institution should offer funds for borrowing at reasonable rates that will attract corporate borrowers and even off shore borrowers who seem to have an even greater aversion to debt.