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International Journal of Management, IT and Engineering
Year : 2016, Volume : 6, Issue : 9
First page : ( 74) Last page : ( 103)
Online ISSN : 2249-0558.

The Factors That Influence Capital Structrure Decisions on Non-Financial Institution Listed in Nairobi Securities Exchange in Kenya

Kung'a Andrew Onyango*, Kawour Elijah

* Faculty of Commerce, Department of Accountingand Finance, Catholic University

Online published on 27 February, 2017.

Abstract

In attempt torestructuring thefirms' capital structure, managers employ the use of debt. The proportion of debt to be used in the firms may be dependent on a number of factors such as profitability, tangibility, firm size, growth rate, volatility of a firm's earnings and Non-debt tax shields. The specific objectives of the study were to examine the relationship between profitability and financial leverage; To investigate the relation between tangibilityand the financial leverage;To determine the effect of sizeon the financial leverage; To investigate the relation between non-debt tax shields and the financial leverage; To establish the effect of growth rate on the financial leverage and to establish the effect of volatility of earnings on the financial leverage. The study was based on thebased of trade-off and pecking order theory which explained the relationship between the financial leverage and their determinants. The study adopted an explanatory non-experimental research design to investigate the effect of the determinants of financial leverage of non-financial companies listed in the Nairobi securities Exchange. The population of the study had 57 firms'listed Nairobi securities Exchange but only 39non-financial firms were included in the study. Given the small number of firms, a census study was conducted where all the 39non-financial firms currently in operation were considered for the period covering period 2008 to 2012. The study used secondary panel data contained in the annual reports and financial statements of all the firms listed at the Nairobi Security Exchange. Descriptive statistics such as mean, range and standard deviation was used. The study usedfixed effects model of panel regressiontoinvestigate the magnitude and directions of the relationship between leverage and determinants of financial leverage. Pearson's correlation coefficient was used to check on the collinearity of the variables. The results showed that listed firm in Kenya, finances their investment activities using 62% total debt and 38% equity on average. Cross correlation terms for all the independent variables were quite low, hence giving little cause for concern about multicollinearity problem. Result from fixed effects model of panel regressionindicated that profitabilityhad a negativeregression coefficientof 0.264 which implied that as profitabilityincreases by 1%, the use of debt reduces by 26.4%. Non-debt tax shield had a positive regression coefficient of 0.980 which implied that as non-debt tax shield increases by 1%, use debt increases by 98%.

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Keywords

capital structure, non-financial companies, trade-off and pecking order theory.

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