THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND VALUE OF NONFINANCIAL FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE, KENYA
Abstract
Purpose: This paper investigates the relationship between capital structure and worth of nonfinancial businesses registered at the Nairobi Securities Exchange, in Kenya.
Methodology: The study uses an unbalanced secondary panel data consisting of 36 nonfinancial firms listed at the Nairobi Securities Exchange (NSE) for the period 2015 to 2019 as at December 31st 2019. The sample selection was showed by data availability. The sectors excluded consisted of firms in banking, insurance, equity investment and real estate, including investment trusts. These exclusions were motivated by regulatory differences and for the ease of comparability of findingss.
Findings: The connection amid capital structure and business worth was found to be positive. This means that capital is a determinant of firms value which supports the notion of trade-off theory and Pecking order theory as they advocate that firms should used debt to finance their operations.
Implications: The results of this study have two major policy implications. First, nonfinancial firms in Kenya could significantly improve their performance if there is established utilisation of debt. Second, whilst policies aimed at popularising external finance to firms could have significant positive impacts on their performance, the benefits of such policies would be much better realised if harmonised with efficient capital market for firms to raise debt capital with favourable interest.
