Influence of Firm Characteristics on Capital Structure of Private Manufacturing Firms in Kenya

Abstract

The main objective of the study was to ascertain how firm characteristics influence the capital structure of private manufacturing firms in Kenya. The specific objectives were to show the influence of earnings, tax shield, dividend payout, interest cover and firm size on capital structure of private manufacturing firms. Ascertaining and attaining an optimal capital structure for many firms is not an easy task. Many manufacturing firms are struggling to operate while others have been compelled to shut down. The study aimed to look at firm characteristics’ influence on capital structure and employed capital structure theories. This study used descriptive research design on a population of 455 CFOs of 455 firms as per KAM members’ directory of 2015. Using stratified sampling a sample of 208 CFOs of 208 private manufacturing firms were selected. The researcher collected primary data using self-administered questionnaires to obtain financial measures from the chief finance officers (CFOs) of these firms and secondary data was collected through a data survey sheet and document review form. The major limitation in this study was that some private manufacturing firms considered financial information as confidential and hence were not willing to give financial information. Nonetheless the researcher managed to obtain for 80 firms on the document review form for secondary data and 144 questionnaires for primary data. Data was analyzed using Statistical Package for Social Sciences (SPSS) version 22 and E - Views. Descriptive and inferential statistics were employed. Under descriptive statistics percentages of responses and means of items was computed. Karl Pearson’s correlation, multiple linear regression and ANOVA was used. The study found that earnings, tax shield, dividend payout and firm size have a positive and significant influence on capital structure. However, the study found that interest coverage has a negative and significant relationship with capital structure. The study also found that firm size moderates the relationship between firm characteristics and capital structure of private manufacturing firms in Kenya. The study concluded that high earnings cause increase in debt. In addition, firms raise capital first from earnings then debt. Most firms also prefer internal finance first before considering external finance. In addition firms raise capital first from earnings then debt. Most firms also prefer internal finance first before considering external finance. The study recommends that chief Finance officers of manufacturing firms should take into account the industry norms when developing their financial policies. Capital structure of comparable companies in the industry should be considered because it might reflect the unique risks inherent in that industry.