The relationship between corporate diversification and capital structure of firms listed at the Nairobi Securities Exchange

Abstract

The objective of the study was to find out the relationship between corporate diversification and capital structure of firms listed in the Nairobi Securities Exchange. This was informed by the fact that in recent years in response to stiff completion, resulting from changes in business environment as well as introduction of competitive policies, many firms have been forced to rationalize their operations and generally review their corporate strategy. Diversification is one of such strategies that allow a company to enter business lines that are different from current operations as well as operate in several economic markets. Financial choices need to be evaluated because of their close interaction with management choices. Optimal capital structure plays a key role in achieving the overriding goal of financial management. The study sought to establish the relationship between diversification on financial choices. For firms listed in Kenya scanty research has been done to study the link between diversification and the existing literature is inconclusive. In this study a deductive approach was used. Data was collected on listed firms’ annual reports covering the period from 2009 to 2013. The annual reports were obtained from the respective company websites and the Capital Markets Authority. Out of 45 listed companies targeted by the study, after excluding 17 companies in the financial sector due to their balance sheets having a different structure, 36 (80%) firms whose complete data was available were studied. Regression analysis and correlation analysis were used to analyze the data in order to test the research objective. The regression model’s coefficient of correlation (R) is 0.382 and coefficient of determination (R2) is 0.146 implying that 14.6% of the variation in capital structure can be explained by the variables in the study, while 85.6% of the variation can be explained by the error term and other factors. The model is statistically significant as indicated by the F value of 5.943 and significance value of 0.000. The results of the study show that diversification has positive relationship with capital structure. This was consisted with both author’s expectations and results from some previous studies. However corporate diversification is a less significant factor in determining capital structure for firms listed in Kenya since the strength of the relationship was found to be very small.