Determinants of Capital Structure for Internet Service Providers in Kenya

Abstract

Raising funds for the growth and operations of the firm is a key issue or any organization. Financing decisions have to be made to determine the sources of funds. There are two major ways of raising finance for any organization; debt and equity. The proportion of debt and equity used to finance a firm define the capital structure. The capital structure is crucial for any organization as it affects the financial risk and tax advantage which arises from use of debt. There are many factors that affect the financing decisions. Raising funds for the growth and operations of the firm is a key issue or any organization. Financing decisions have to be made to determine the sources of funds. There are two major ways of raising finance for any organization; debt and equity. The proportion of debt and equity used to finance a firm define the capital structure. The capital structure is crucial for any organization as it affects the financial risk and tax advantage which arises from use of debt. There are many factors that affect the financing decisions. Three major theories that attempt to define the factors that influence the capital structure; pecking order theory, trade of theory and MM irrelevance theory. This purpose of this study is to examine determinants of capital structure for internet service providers in Kenya (ISPs). The ISPS is one of the sectors of the telecommunications industry which has been experiencing a lot of growth with many entrants venturing into this industry. The study sampled a few firms based on the quarterly CCK reports for September 2014 which revealed that eleven firms controlled 99.5% of the total market share. Secondary data of the financial statements of the sample population for the period between 2009 and 2013 was used for this study. Regression analysis was used to analyse the data that was collected. The factors which were tested are profitability, liquidity, assets tangibility, growth and size of the firm. The study found that all these factors influenced the capital structure of the ISPs in Kenya. The study established that profitability, asset tangibility and growth positively influence the capital structure decision whereas liquidity and size of the firm negatively affects the capital structure.