The relationship between market power and capital structure of companies listed in the Nairobi securies exchange

Abstract

A firm's ultimate survival depends upon how well it competes in the product market. Donaldson (1961) reported that an important determinant of a firm's debt policy is its relative market position in the industry. Maximizing the firm’s value is the focal point for every financing decision made by the management of the company (Al-shubiri, 2011). The study objective was to establish the relationship between the market power and capital structure of firms listed in the Nairobi Securities Exchange. Secondary Data was collected from the Companies Financial Report and Nairobi Securities Exchange. Regression analysis was done for the periods to establish the relationship between the capital structure and the market power of firms listed in the Nairobi Securities Exchange. The study covered a period of 10 years from year 2004 to 2013. The findings of the study confirmed that there exists a inverse relationship between mark power capital structure of firms listed in the Nairobi Securities Exchange. This can be explained by various factors such as the role of a high share prices increasing the market power in turn leading to firms opting to issue more equity which will be highly priced leading to higher proceeds from the issue. Upon examining other variables that have an impact on capital structure, profitability depicted a negative relationship with capital structure. The positive relationship with capital structure was established among the following control variables; growth of the firm, size of the firm, ownership and tangibility of the firm. Market power therefore is one of the variables which need to be taken into account as firms decide on the target capital structure. The investors are suggested to stimulate firms to disclose more information about the market share of their productions. This is the information which might affect the expected earnings of the investors and the probability of bankruptcy. The investors are also proposed not to rely merely on the profitability of the firms; it is better to pay attention to some items such as the position of the firm in the industry, the current position of the firm in the product market, compound of the capital structure and trend of creating debts for the firms and competitors