Effects of firm size on the relationship between interest rates and capital structure of listed manufacturing and construction firms in Kenya
Muriithi, Lameck Nyaga
MetadataShow full item record
Manufacturing and construction businesses are capital intensive. Therefore, decisions on how to finance the operations of such businesses in a cost-effective and sustainable way are critical. The debt-equity mix depends on many things, key among them being the interest rates prevailing in the debt markets accessible to the firm. The aim is to find the effect of interest rates on the capital structure of manufacturing and construction firms. Specifically, this study analysed whether the interest rates regime, whether market-determined or capped, influenced the capital structure preference by these capital-intensive sectors. This study further investigated the moderating effect of a firm’s size on the relationship between interest rates and capital structure. The research borrowed heavily from the trade-off theory and adopted a descriptive research design. The population used included all the 67 firms listed in the Nairobi Securities Exchange (NSE). 14 firms were used as a sample from all listed companies on the NSE. Data was collected from both financial statements as well as the Central Bank of Kenya website. The research obtained a 95% observation rate and the panel data was used to give a more appropriate understanding of the phenomena being tested. The findings indicate that firms will take up less debt when interest rates are market-determined compared to when interest rates are capped. On a macro level, the research findings recommend that government policy and regulation should be done considering the impacts of regulating interest rates on the performance of private sector firms. On a micro level, boards and management teams should take advantage of low and stable interest rates to increase debt holding in financing their business operations. The results of the research are useful in informing strategic capital structuring decisions by the manufacturing and construction sector players and policy formulation by regulatory bodies.