Effects of firm size on the relationship between interest rates and capital structure of listed manufacturing and construction firms in Kenya
Date
2020-01
Authors
Muriithi, Lameck Nyaga
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
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.
Description
A Thesis submitted in partial fulfillment of the requirements for the award of the Degree of Masters of Business Administration at Strathmore University Business School
Keywords
Construction companies, Interest rates, Capital structures