Analysis of the macroeconomic determinants of a firm's capital structure

Abstract

This study analyses the relationship between macroeconomic factors and the capital structure of 55 listed companies in Kenya. The questions answered are what is the effect of macroeconomic conditions on capital structure and is there a difference in effects across segments? Panel data analysis is applied and a random effects model is used for the sample period 2004-2014. Fisher type unit root test is used to test for panel data stationarity. The segments analyzed in the research include; agricultural sector, manufacturing & allied, investment, banking, insurance, construction & allied, energy & petroleum, automobiles & accessories and commercial & services. The leverage ratios tested were debt to equity and total debt ratio. The independent variables tested were GDP, inflation, interest rates, exchange rates, asset tangibility and size. The findings of the study indicate that the macroeconomic determinants do not have an effect on the capital structure decisions of the listed firms as a whole. Results of the analysis of the different segments concluded that interest rate and inflation had an effect on the agricultural companies' capital structure decisions while interest rate, inflation and exchange rate had an effect on the energy and petroleum industries capital structure decisions. In conclusion none of the macroeconomic determinants affect the industry as a whole but interest rate, inflation and exchange rate are the macroeconomic determinants that are significant across the segments.