Effect of Corporate Governance on Capital Structure of Firms Listed at the Nairobi Securities Exchange

Abstract

The environment in which companies in the developing countries are operating is in progress and highly competitive and they are obliged to compete national and international factors and expand their activities through new investments for survival. Decisions by firms for financing their investment have to be strategic and good to the eyes of the investors. The organ responsible for making some key decisions in a firm are the board of directors and the nature of governance. This study sought to establish the effect of corporate governance on capital structure of the firms listed in Nairobi Securities exchange. The researcher collected data on corporate structure and leverage ratio from the companies listed in the NSE for the period between 2010 and 2014. The data was analyzed through descriptive statistics and inferential statistics such as correlation and regression. The study found that increase in the size of the board, increase in the number of meetings per year and increasing the size of the firm increased the level of leverage. Further, the study found that increasing the number of non-executive members and the profitability of the firm slightly lowered the leverage of the firms. In a nutshell, the study found a slight effect of corporate governance on the capital structure of firms. This information can be used to inform the policies made by the management of the firms on corporate governance so as to have the optimum board size, meetings per year and optimal level of board independence. It is also very useful to investors as they evaluate firms to make investment decisions.