The Relationship Between Capital Structure and Shareholder Value for Companies Listed in the Nairobi Securities Exchange

Abstract

Decision making on capital structure is one of the most challenging and difficult issues facing the companies. The capital structure of a company is a combination of debt and shareholders equities. Empirical research has shown controversial evidence on the relation between capital structure and shareholder value and the ambiguous results that have emerged regarding the existence of a relation between capital structure and shareholder value. This study sought to answer the following research question is there a relationship between capital structure and shareholder value for companies listed in the Nairobi Securities Exchange? The causal study design that was employed in this research. The study population was composed of all 60 companies listed at the NSE. The study sampled 40 companies which were stratified by time periods for a period of five years between years 2007 to 2011. The data collected from the secondary source was quantitative in nature. Data analysis was done using SPSS Version 20 whereby inferential statistics was applied whereby a multiple regression model was employed. The empirical model was used in the study to test the relationship between capital structure and shareholder value for companies listed in the Nairobi Securities Exchange. The findings of the study confirmed that there exists a negative relationship between leverage and Market to Book ratio. The study recommends that companies at NSE must follow the financing hierarchy as postulated by the pecking order concept i.e. internal funds should be used before debt financing and then equity as equity and debt financing are more expensive and they reduce shareholder value in the company compared to internal funds.