Some Factors That Influence the Capital Structures of Public Companies in Kenya

Abstract

The subject of capital structure is one of the controversial areas in finance and one that has attracted a great deal of attention since 1958. Since then, a lot of theoretical and empirical work have been done in this area but many issues still remain unresolved Modigliani and Miller (MM) in arguing the 'case for irrelevance envisaged no positive role for financial ,management or the possibility of optimal financing decisions. Later developments, however, showed that market imperfections may impact differently on individual firms thus making an individual firm's capital structure important. The principal objective of this study was to identify the factors that the management of quoted companies in Kenya consider in making their capital structure decisions. The study also sought to establish whether some of these factors had more influence than other so In order to meet these objectives, information was sought through the use of questionnaires from the financial managers of publicly quoted companies and practising accountants who offer financial advisory services to management. The capital structures of the public companies were also analyzed with a view to ascertaining whether some of these factors might be reflected in the existing capital structures. The study found that many factors may influence the capital structure of a firm. Among the most important factors were the stability of future cashflows, the level of interest rates in the economy the asset structure of a firm, the need for outside capitall lenders' attitudes towards a firm and the attitudes of management towards risk. Analysis of the capital structures revealed that a firm's use of debt and its age, size, and amount of fixed assets were positively correlated but the correlation coefficient was rather low. It is appreciated that much remains to be done towards developing models that are suitable for empirical testing. Nevertheless, the study suggests among other things that further research is needed to determine the place of the theories of capital structure in Kenya through empirical tests