Effects of Change in Capital Structure on Performance of Companies Quoted in Nairobi Stock Exchange

Abstract

Restrictions on the capital structure of a public company may harm the company's performance by preventing owners [from choosing the best capital structure. Many theoretical and empirical analyses have also dealt with change in capital structure and its effect on firm performances. Capital structure change has always been one of the main topics among the studies of many scholars. Its importance derives from the fact that capital structure is tightly related to the ability of firms to fulfil the needs of various stakeholders. The last century has witnessed a continuous developing of new theories on the issue of change of capital structure and its effect on performance. The objective of the study was to address the effect of change in capital structure on performance in companies listed in Nairobi Stock Exchange. This was a descriptive study that utilized a descriptive survey approach on the 45 companies that had traded at NSE consistently from 2003 to 2007. The use of secondary data sources used in the study was obtained from published reports of quoted companies. Both quantitative analysis and inferential analysis was used as data analysis technique whereby the OLS regression model was used. The study findings showed that there was significantly positive relationship between SDA and profitability since short-term debt tends to be less expensive and increasing it with a relatively low interest rate will lead to an increase in profit levels and hence performance. The study further concluded that profitability increases with the control variables, that is, size and sales growth. The study recommended that owing to the less cost incurred in obtaining short term loans than long term ones, companies should go for short term loans.