A study of the dynamic determinants of capital structure of companies listed in the Nairobi Stock Exchange

Abstract

The capital-structure decision is one of the most fundamental issues in finance. Numerous studies have been conducted to test the two major competing theories of capital structure that is, the Trade-Off Theory and Pecking-Order Theory, yet none of these studies has analyzed the capital-structure decisions of firms quoted in the NSE overtime, This study's aim is to determine the factors determining the capital structure of firms quoted in the NSE and to specifically investigate the determinants of a time-varying optimal capital structure. The study takes a longitudinal perspective and therefore uses dynamic panel data to realize its objectives. The research further gives findings based on static models. Chapter one is an introduction of the project as whole. Chapter two is literature review, from the books, research projects and the internet on what is perceived to be the determinants of an optimal capital structure. Chapter three expounds on the methodology used. Chapter four provides an exposition of the data analysis and findings while, chapter five gives the conclusions and suggestions for further research. The major finding of this research is that theory may not be used to explain the determinants of a time-varying optimal capital structure of companies listed in the NSE. This is attributed to the peculiarities of an under-developed financial market such as the NSE. It finds slow adjustments towards an optimal capital structure possibly due to high costs of adjustments. The study concludes by recommending a study aimed at determining what factors may be in play in the determination of an optimal capital structure of firms quoted in the NSE and which are not explained by theory.