Capital Structure of Listed Firms in Kenya: the Case of Non Financial Firms

Abstract

This study investigates the capital structure of listed firms in Kenya with an intention of identifying the factors that determine their capital structure. In particular, the study seeks to determine both firm specific and macroeconomic factors as well as to assess the relevance of capital structure theories in Kenya. The study is conducted based on a sample of 29 non financial firms listed on the Nairobi Securities Exchange during the period 2004-2012 using panel data estimation technique. Both the fixed effects and random effects models are estimated and the results reveal that firm specific factors affecting the capital structure of listed firms in Kenya are asset tangibility, firm’s profitability, size of the firm, firm’s growth opportunities and finally liquidity of a firm’s assets while the macroeconomic factors are economic growth and corporate tax rate. It is further established that the behaviour of Kenyan firms can best be explained by pecking order theory which is an indicator of asymmetry in the capital market. These results have important implications for policy and therefore the study provides a number of policy recommendations. First, the government should offer financial products targeting firms in the small and medium market segments since they are usually overshadowed by bigger ones when it comes to acquiring capital for investment. Second, policies that encourage economic growth and macroeconomic stability need to be implemented and finally, measures that minimize asymmetry of information in the capital market are highly encouraged.