A study of gearing levels and company size of firms quoted At Nairobi Stock Exchange

Abstract

The gearing level of firms is influenced by diverse factors. However the factors vary amongst firms and industries. Different researchers, for example Kamere (1987) and Omondi (1996) obtained differing conclusions on the important determinants of gearing level of firms. This study had the objective of determining the gearing level of companies quoted at the Nairobi Stock Exchange as well as establishing whether there is a correlation between gearing levels and company size of firms quoted at the Nairobi Stock Exchange. The factors used to measure size of firms for the study period were market capitalization, net assets and turnover. Firms were ranked in pecking order based on their market capitalization and classified into three groups of large firms, medium firms and small firms and their respective aggregate gearing computed. The results of company size and gearing were plotted on graph and also regressed for the entire period. This was also done at industry level. A similar process was applied to all the firms using net assets and turnover as measures of size. The study found out that size, as measured by net assets is positively correlated to gearing at both market and industry cIassification of firms into large, medium and small with coefficient of determination being at 30%, 40% and 30%; and 22%, 55% and 11% respectively. The second finding was that size, as measured by turnover is positively correlated with gearing at market classification of assets into large, medium and small,

However, at industrial classification, the correlation is insignificant. Lastly, size, as measured by market capitalization is positively, but insignificantly correlated to gearing levels both at market and industry classification. The graphical analysis produced mixed results and is tabulated elsewhere in this text. It is also important to consider that the period under study had two interest rate regimes. The period up to 2002 had high interest rates while the period after 2002 had low interest rates. The graphical analysis depict that after stabilization of the interest rates in the year 2003, large companies recorded higher gearing at market classification irrespective of the determinant of size. All in all, the results from the various tests indicate that there are disparities in the correlation between gearing level and size of firms. Possible explanations for this includes the different interest rates regimes and small number of firms under study, which is dictated by the number of companies listed at the Nairobi Stock Exchange.