Determinants of Capital Structure of Manufacturing Firms Listed at the Nairobi Securities Exchange

Abstract

This study analyzed the determinants of capital structure in manufacturing sector in Kenya: a case study of listed firms at Nairobi Securities Exchange. The study analyzed the listed manufacturing firms for the period 2008 – 2014 thus yielding to a panel data analysis. Both the fixed effects and the random effects model were estimated and the Hausman test used to choose the most appropriate model of the two. From the Hausman test’ results, the random effects model was selected as the most appropriate implying that the manufacturing firms listed at the NSE are different from one another in the way they operate and consequently they are different in the way they choose the capital structure mix between equity and capital. The findings of the study revealed that both the fixed effects and the random effects model yield the same conclusions through the coefficients and the significance levels are different. The conclusion of the study was that the ratio of profits to total assets (PRE), Profits before tax (TAX), and the size of the company (LOG SIZE), the companies’ turnover (GRW), ratio of fixed assets to total assets (ASSETS), variability of profits (RISK) and the Gross Domestic Product are all significant in informing the choice of capital structure among the listed manufacturing companies in Kenya as they are all relevant when making the capital structure choice decision. Finally, the study concluded that manufacturing firms are completely different in terms of their operations and their choices for their respective capital structure mix between equity and debt financing. The manufacturing firms differ in terms of sizes, products manufactured, kind of investment made, management choices, their growth, objectives and goal targets. As such one cannot make a generalized conclusion on the operations and the capital structure choices for all the listed manufacturing firms in Kenya. The determinants analyzed all showed that they were relevant in the capital structure choice in Kenya thus they can be used a guide in determining the capital structure choice for manufacturing firms