A Study of Capital Structure in Kenya

Abstract

The capital structure of a firm is influenced by certain factors. However what these factors are is still not very clear. Different researcher5 e.g. Kamere(1987) and Baliga, (1987) Ferri and Jones (1979) etc.obtained differing conclusions on what the important determinants ofcapital structure are. This study aims at first of all determining what the capital structures of Kenyan public firms are. Secondly, the study tries to find out on thebasis of other researchers findings, which factors significantly influence capital structure in the Kenyan environment. The factors which were tested are The Firms Age, Industrial Class, Growth, Size, Interest Charges, Variability in Cashflows, Profitability, Asset Structure and Ownership. ~he study found that though Industrial Class is not statistically significant, the capital structures of firms on the sectoral basis are quite different. The Industrial and Allied Sector has the highest debt-equity ratio of ~.301 followed by the Agricultural Sector with 0.108. Third comes the Financial and Investment Sector with 0.058 and last comes the Commercial and Allied Sector with a ratio of 0.009. A testwas done to compare the pre-and post-liberalisation capital structures and the results indicated that the two periods are significantly correlated implying that liberalisation has so far not created finally the overseas controlled enterprises. The results obtained from the other tests indicate that in the combined run of the sectors, four out of eight factors tested, proved tobe significantly correlated with capital structure and these were, Profitability, with a coefficient of 0.65017 Growth in Turnover with a coefficient of 0.48498, Growth in Ass3t Value with a coefficient of 0.55666 and Asset Str~cture with a coefficient of 0.40354. The least correlated factor was Interest Charges with a coefficient of 0.06939. In the Agricultural Sector, the Changes in Movement of Working Capital was the only factor that turned out significantly correlated with Capital Structure. The factors Asset Structure and Grwoth in Turnover both had positive insignificant correlation coefficients while the factors Profitability, Interest Charges and Turnover had negative insignificant correlation coefficients with capital structure. In the Industrial and Allied Sector, no factor tested had a significant correlation relationship with Capital Structure though the highest correlated factor was Growth in Turnover. The least correlated was the Changes in MovemenCof Working Capital. The factors Profitability and Interest positive values of 0.846 and 0.743 respectively. The least correlated factor was Interest Charges which was negatively correlated with a coefficient ~f -0.009. The other factors were positively correlated In the Financial and Investment Sector, no factor tested, showed any.significant correlation with Capital Structure. However out of all of them, Profitability was the highest correlated with a coefficient of0.761. The least correlated was Asset Structure which had a value of0.09. The factors Changes in Movement of Working Capital and Turnover both had negative correlation coefficients suggesting opposite movements with capital structure. All in all, the results from the sectoral tests do indicate that there are disparities in the factors that influence Capital Sttructure. Possible explanations for this are presented in this text however suffice to state thatmost differences arise from the very natures of sectors themse