Influence of Heterogeneity of Investors’ Behaviour on Corporate External Financing Decision by Listed Companies in Kenya

Abstract

There is evidence of irrationality and repeated errors in judgement by individual investors, corporate investors and corporate agents in their quest to invest and access external financing respectively. This study was conducted with a purpose of determining the influence of heterogeneity of investors’ behaviour on corporate external financing decision by listed companies in Kenya for a period of ten years from 2007 to 2016. To achieve this, secondary data was collected from the institutions published financial reports and Nairobi Security Exchange trading reports. The target population was 67 companies however the study excluded 14 companies that had been suspended, delisted and those listed for less than five (5) years during the study period. The study utilised a descriptive research design while adopting a parametric approach and a multinomial logistic regression model to analyse data on influence of heterogeneity of investors’ behaviour on corporate external financing decision, while controlling for institutional leverage. The study employed content analysis of audited group annual reports, NSE share prices, 20 share indexes and Nairobi all share index (NASI) to establish the influence of heterogeneity of investors’ behaviour on corporate external financing decision over the period 2007-2016. Data was analysed aided by SPSS software version 21 and Stata Software version 12.0. The parameter findings indicate that corporate external financing decision is significantly influenced by heterogeneity of investors’ behaviour. The study established that equity financing is influenced negatively by investors risk perception. Similarly the study established that straight debt financing is influenced negatively by one unit increase in behavioural bias, investors’ preference and analysts’ dispersion. However investors risk preference and corporate size dispersion influence positively straight debt financing decision relative to covered debt financing, such that one unit increase in these variables influences positively straight debt financing decision. The study experienced a number of limitation including dependency on secondary data, limited studies in Africa on behavioural finance and missing data as some institutions had less than 5 years of listing. To minimize these all companies listed for less than 5 years were eliminated from the study. The findings of this study indicate that besides external and internal factors, investors’ heterogeneous behaviours have significant influence on corporate external financing decision. Agents of companies wishing to source for external finances need to consider investors’ behaviour while making external financing decisions. From the findings of this study, there is need to enhance investment knowledge of both corporate investors and investment trusts in Kenya in order to minimise behavioural biases, investors’ preferences and unwarranted risk perceptions that might lead to investors heterogeneous behavioural influences. Therefore availability of all market information and elimination of information prejudice will encourage both corporate and individual investors to invest in the market therefore enhancing corporate access to external funds and ultimately growth of the market. The study recommends that organizations seeking external financing should understand, when it is optimal to issue debt and or equity by considering investors behaviour. The study also recommends that the government as policy formulator and enforcer through various enforcement agencies should come up with legislation that discourages behavioural bias and preferences that may affect external financing decisions made by corporates and also influencing financing small and medium enterprises and ultimately limiting availability of investment opportunities to both external and internal investors.