Capital Structure Choice

Abstract

If it is difficult for a firm to measure impact on the value of the firm under different levels of leverage, it should not be surprising that managers are not very concerned about maintaining an exact capital structure. The judgment required to make sound financing decisions implies that managers balance the need to avoid dilution against (for example) the need to grow and maintain financial flexibility. This study sought to find out the factors that motivate management of industrial firms in Kenya in choosing their capital structure. The findings revealed that managers do avoid issuing under- valued securities by financing first with internal equity and then with external claims that are least likely to be mis-priced. Internal equity is the most preferred source, external equity is the least and straight and convertible debts are in the middle. The pecking order theory seems more predictive of how financing decisions are made in practice. More descriptive still, however, are the conventional financial planning principles.