EFFECT OF FIRM CHARACTERISTICS ON CAPITAL STRUCTURE OF MANUFACTURING FIRMS IN NAIROBI COUNTY, KENYA

Abstract

The manufacturing sector in Kenya contributes significantly to the economic growth. Therefore, it is important to evaluate factors that determine the firms’ capital structure. The aim of this research was to establish the effect of firm characteristics on capital structure of manufacturing firms in Nairobi County, Kenya. Specifically, the study sought to determine the effect of firm size, liquidity, firm growth, non-debt tax shield and profitability on the capital structure of manufacturing firms in Nairobi County, Kenya. The study was built on three theories: Resource-Based Theory, Pecking Order Theory, and Agency Theory.  Descriptive research design was employed and the study population was 364 manufacturing firms in Nairobi County. Fisher formula was used to generate a sample of 106 firms, which were selected using simple random sampling technique. Secondary data was collected using data collection sheet for a period of 10 years from 2009 to 2018. Data was extracted from audited annual financial records of the manufacturing firms stored in the Kenya Association of Manufacturers website. The collected data was analyzed quantitatively by use of descriptive statistics, correlation and regression analyses with the aid of Statistical Package for Social Sciences (SPSS) version 20. The findings indicated that individually, firm characteristics had a significant effect on capital structure. In addition, a combination of firm characteristics resulted to a significant effect on capital structure except for liquidity. The research concluded that firm size best explains capital structure, followed by growth, non-debt tax shield, profitability and lastly liquidity. This study will provide a clear guideline on how manufacturing firms balance between debt and equity financing.