The Determinants of Corporate Debt Maturity Structure for Companies \quoted at the Nairobi Stock

Abstract

This paper exarnmes the empirical determinants of a firm 's debt maturity structures for a sample of 30 firms quoted at the Nairobi Stock Exchange over the period 1998- 2002. The debt measure for debt maturity used is the weighted average maturity of a firm 's debt, debt like obligations and current liabilities. The primary theories of debt maturity structure tested as suggested in the literature include the agency cost hypothesis, signaling, liquidity risk, matching and tax hypotheses. This study uses a unique analysis in the respect that no previous test on maturity hypotheses utilizes such extensive and reliable information about firms' debt maturity structures across time. We use both cross sectional and pooled time series regressions to analyse debt maturity structure determinants. The evidence from the study provides support for the contracting cost hypothesis. Consistent with Myers' (1977). firms that have more growth options in their investment opportunity sets have less long term debt in their capital structure. Large firms have more long term debt. We find little evidence that firms use the maturity structure of their debt to signal information to the market. We also find strong support for the prediction of non monotonic relation between debt maturity and default risk; firms with high default risk use more long terru debt and vice versa. The evidence from this study also supports the matching hypothesis that firms should match the maturity of their debt to that of their assets. We find no evidence that taxes affect debt maturity.