The Relationship Between Corporate Governance and Capital Structure for Companies Listed in the Nairobi Stock Exchange

Abstract

This paper examines the relationship between capital structure and corporate governance for companies listed in the Nairobi Stock Exchange. The paper specifically assesses how the adoption of corporate governance structures influences financing decisions of the firms. The results of the Pearson product moment correlation of 0.769 indicate a strong positive correlation between corporate governance and capital structure. The r square of 0.591 indicates that corporate governance influenced up to 59.1 % of the variance in capital structure. The positive relationship with firm size may be because large firms have higher debt capacity. Large firms also tend to provide more information to lenders than small firms. Positive and significant relationship is seen between capital structure and growth. This is in line with the pecking order consideration where the relationship between growth opportunities and leverage is predicted to be positive. The results indicate negative relationships in the case of board composition, profitability and managerial. The negative relationship with board composition could suggest that boards that have too many outsiders lose the expertise associated with officers serving on the board. The negative relationship with profitability is consistent with the pecking order hypothesis. Managers have pecking order in which retained earnings represent the first choice, followed by debt financing, then equity. Higher profits provide more internal financing. There is a very weak negative correlation between capital structure and managerial ownership. It is clear from the study, that corporate governance structures influence the financing of the firms in the Nairobi Stock Exchange