FACTORS DETERMINING DEBT AND EQUITY CHOICES OF A FIRM IN
KENYA
BY
1) CP123/60453/11- PATRICK MUTIE MUSYOKA
2) CP123/60041/12- JONES OGINDA NYABICHA
3) CP123/60105/12- JOSEPHINE NDUNGWA MUINDI
4) CP123/60126/12- GILBERT KIPSANG KOSGEI
5) CP123/60131/12- SARAH MORAA OIRA
6) CP123/60074/12- JAMES WAKORI MACHARIA
7) CP123/66631/13- EVANS RONALD MUTHAMA
8) CP123/66557/13- PETER NABUNABA WAFULA
9) CP123/60100/12- GRANTON MWAMBINGU
10) CP123/66680/13- CAROLINE WACERA MAINA
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR THE COMPLETION IN AWARD OF THE BACHELOR OF
COMMERCE DEGREE AT EGERTON UNIVERSITY BANKING AND FINANCE
OPTION, FACULTY OF COMMERCE.
EGERTON UNIVERSITY
MAY 2015.
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DECLARATION & APPROVAL
DECLARATION
This Research Project is our own original work and has not been presented for a degree
qualification in any other University or Institution of higher learning.
REG’ NO NAME SIGN DATE
CP123/60453/11 PATRICK MUSYOKA ---------------------- ----------------------
CP123/60105/12 JOSEPHINE MUINDI ---------------------- ----------------------
CP123/60041/12 JONES NYABICHA --------------------- ----------------------
CP123/60131/12 SARAH OIRA ---------------------- ----------------------
CP123/60100/12 GRANTON MWAMBINGU ---------------------- ----------------------
CP123/60126/12 GILBERT KOSGEI ---------------------- ----------------------
CP123/66680/13 CAROLINE MAINA ---------------------- ----------------------
CP123/60074/12 JAMES WAKORI ---------------------- ----------------------
CP123/66557/13 PETER WAFULA ---------------------- ----------------------
CP123/66631/13 EVANS MUTHAMA ---------------------- ----------------------
APPROVAL
This Research Project has been submitted for Examination with my approval as the
University Supervisor
SIGNED………………………………………….. DATE………………………………
DR.FREDRICK M. KALUI
Faculty Commerce
Egerton University
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COPYRIGHTS
© 2015 [email protected]
All rights reserved. No part of this project may be reproduced, stored in any retrievable
system or transmitted in any form or means of electronics, hard copy, photocopying or
otherwise without prior written permission of the authors or Egerton University.
iii
DEDICATION
This project is dedicated to our families who have been patient and understanding, parents
and all friends of good will who were source of inspiration and support in the course of our
studies for their guidance, prayers, encouragement and financial support. May the good Lord,
God Almighty bless them abundantly.
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ACKNOWLEDGEMENT
The BCOM programme has been a long, demanding and challenging journey and the
successful completion has been as a result of support received from many people. We are
indebted not only to those who gave us the inspiration, support and encouragement to pursue
degree course but also to everybody who gave us guidance and assistance on what has been
suggested in this project. Special thanks go to our supervisor Dr.Fredrick Kalui, Faculty of
Commerce, Egerton University Nairobi City Campus for his continued advice throughout the
project period. Our families, brothers and sisters, relatives and friends thanks a lot for your
support. All our classmates and others who in one way or the other gave us support please
receive our heartfelt thanks. Above all, special thanks to the Almighty God for the gift of life
and good health, lack of which we would not have made it this far.
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ABSTRACT
The choice between debt and equity financing has been directed to seek the optimal capital
structure. Several studies show that a firm with high leverage tends to have an optimal capital
structure and therefore it leads to good performance while the Modigliani-Miller theorem
proves that it has no effect on the value of the firm. The importance of these issues has only
motivated the researchers to examine the relationship between firm size, asset structure
profitability, attitude of top management and corporate tax to debt and equity financing
choice of a firm in Kenya.
The firms financing choice was informed by; return on capital employed (ROCE) which
measures firms profitability , current ratio which measured asset structure, total assets which
measured firm size and corporation tax paid. The period of study was 2009-2013. It was
important to note that during the period of study, Kenya experienced a lot of political anxiety
due to the political climate informed by the general election which was due 2013 March,
leading to uncertainty in the securities market. This presented an interesting period of study
considering the ups and downs of trade cycles. The population of the study consisted of all 60
listed firms duly registered with Capital Market Authority of Kenya as at 2013.Secondary
data used was obtained from the Nairobi Securities Exchange handbook and also in firm’s
publications. Data analysis was done by use of regression analysis model with the help of
statistical package for social science software. The results obtained revealed that there was a
relationship between dependent variable (debt and equity) and independent variables
(profitability cost of capital, firm size, asset structure, corporation tax and attitude of top
management).
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TABLE OF CONTENTS
DECLARATION & APPROVAL ............................................................................................. I
DECLARATION ....................................................................................................................... I
COPYRIGHTS ......................................................................................................................... II
DEDICATION ......................................................................................................................... III
ACKNOWLEDGEMENT ....................................................................................................... IV
ABSTRACT .............................................................................................................................. V
CHAPTER ONE ...................................................................................................................... 1
INTRODUCTION ..................................................................................................................... 1
1.1 Background to the Study ...................................................................................................... 1
1.2 Statement of the Problem ..................................................................................................... 5
1.3 Objective of the study .......................................................................................................... 5
1.3.1 General objective .............................................................................................................. 5
1.3.2The specific objectives of the Study .................................................................................. 5
1.4 Research Questions .............................................................................................................. 5
1.5 Importance and Value of the Study ..................................................................................... 6
1.6 Scope and justification of the study ..................................................................................... 6
1.7 Limitation of the study ......................................................................................................... 7
1.8 Definition of Operational Terms .......................................................................................... 7
CHAPTER TWO ..................................................................................................................... 9
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LITERATURE REVIEW .......................................................................................................... 9
2.1 Introduction .......................................................................................................................... 9
2.2 The effects of firm’s size on its debt and equity choices ..................................................... 9
2.3 The effect of firm’s profitability on debt and equity choice .............................................. 10
2.4 Business Finance ................................................................................................................ 10
2.4.1 Debt Financing. ............................................................................................................... 11
2.4.2 Equity Financing ............................................................................................................. 12
2.4.3 Viability of Financial Decision ....................................................................................... 13
2.5 Firm’s Asset Structure ....................................................................................................... 13
2.5.1 Liquidity Risk ................................................................................................................. 14
2.6 Firms Tax Rate ................................................................................................................... 15
2.7 Empirical Studies ............................................................................................................... 15
2.8 Theoretical Review ............................................................................................................ 17
2.8.1 Trade-Off Theory of Capital Structure ........................................................................... 17
2.8.2 Pecking Order Theory of Capital Structure .................................................................... 18
2.8.3 Agency Cost Theory ....................................................................................................... 18
2.8.4 Information Asymmetry Theory ..................................................................................... 19
2.8.5 Capital Structure Theory ................................................................................................. 20
2.9 Conceptual framework ....................................................................................................... 21
CHAPTER THREE ............................................................................................................... 22
RESEARCH METHODOLOGY............................................................................................. 22
3.1 Introduction ........................................................................................................................ 22
3.2 Research Design................................................................................................................. 22
3.3 Population of the Study ...................................................................................................... 22
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3.4 Sampling Design ................................................................................................................ 23
3.5 Data Collection .................................................................................................................. 24
3.6 Data Analysis ..................................................................................................................... 24
The Regression Equation ......................................................................................................... 24
3.7 Reliability and Validity of Tests ........................................................................................ 25
CHAPTER FOUR .................................................................................................................. 26
DATA ANALYSIS AND PRESENTATION OF FINDINGS ............................................... 26
4.1 Introduction ........................................................................................................................ 26
4.2 Background Information of the Study Respondents .......................................................... 26
4.2.1 Respondents Genders ...................................................................................................... 28
4.2.2 Respondents age bracket ................................................................................................. 28
4.2.3 Level of Education .......................................................................................................... 29
4.2.5 Respondents position in their work place ....................................................................... 30
4.3 Factors Affecting Debt and Equity Choices of Firms in Kenya ........................................ 31
4.3.1 Attitude of the Top Management .................................................................................... 31
4.4 Discussion of findings........................................................................................................ 32
4.5 Effect of Various Factors on Debt and Equity Choices ..................................................... 32
4.6 The Relationship between Independent Variables on Debt and Equity Choice ................ 33
4.7 Effects of Various Variables on Debt and Equity Choices of a Firm in Kenya ................ 34
4.7.1 Relationship between profitability, debt and equity choice ............................................ 35
4.7.2. Relationship between corporate tax and debt and equity choices .................................. 36
4.7.3. Relationship between asset structure and debt and equity choices ................................ 36
4.7.4 Relationship between firm size and debt and equity choices ......................................... 36
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CHAPTER FIVE .................................................................................................................... 38
SUMMARY, CONCLUSION & RECOMMENDATION...................................................... 38
5.1 Introduction ........................................................................................................................ 38
5.2 Summary and Conclusions ................................................................................................ 38
5.3 Policy Recommendations................................................................................................... 39
5.3.1 Use Equity rather than Debt ............................................................................................ 40
5.3.2 Consider the Firms Asset Structure ................................................................................ 40
5.4 Limitations of the Study..................................................................................................... 40
5.5 Suggestions for Further Studies ......................................................................................... 41
REFERENCES ....................................................................................................................... 42
APPENDIX I: QUESTIONNAIRE COVER LETTER ........................................................... 46
DEBT AND EQUITY CHOICES QUESTIONNAIRE .......................................................... 46
APPENDIX II: QUESTIONAIRE ........................................................................................... 47
APPENDIX III: RETURN ON CAPITAL EMPLOYED MEASURING PROFITABILITY 49
APPENDIX IV: LIQUDITY RATIO MEASURING THE ASSET STRUCTURE OF A
FIRM ........................................................................................................................................ 50
APPENDIX V: CORPORATE TAX MEASUREMENT OF THE FIRMS ........................... 51
APPENDIX VI: THE FIRM SIZE MEASUREMENT ........................................................... 52
APPENDIX VII: LISTED FIRMS ......................................................................................... 53
TARGET POPULATION OF QUOTED FIRMS. .................................................................. 53
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LIST OF FIGURES
Figure 2.1 Conceptual Framework………………………………………………………….21
Figure4.1 Respondents Gender……………………………………………………………..28
Figure4.2 Respondents Age Brackets…………………………………………………….....29
Figure 4.3 Level of Education…………………………………………………………...….29
Figure 4.4 Respondents years in employment………………………………………...…….30
Figure 4.5 Respondents position in their workplace……………………………………...…31
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LIST OF TABLES
Table 3.1 Target Population.................................................................................................23
Table 4.1 Demographic Data………………………………………………..………….…27
Table 4.2 Attitude of top management.………...………………….………………..…......31
Table 4.3 Descriptive statistics of debt…………………………………….……..…..…...32
Table 4.4 Descriptive statistics of equity………………………………………..….…..…32
Table 4.5 Pearson Correlation on equity…………………………………………..…..…..33
Table 4.6 Pearson Correlation on debt…………………………….………………….…..33
Table 4.7 Regression Results for Factors affecting Debt Financing Choice....………..….34
Table 4.8 Regression Results for Factors affecting Equity Financing Choice………...….38
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Firm’s development and growth plays a very strategic role in the development of economic
and social standards of residents of any country especially developing countries like Kenya. It
is important to understand that numerous factors contribute to why firms established in
developing countries fail to start or progress in their respective industries. It is important for
firms to be able to finance their activities and grow over time if they are ever to play part in
strategic role of solving the micro and macro-economic issues in the country as well as
providing sufficient returns to shareholders/investors in form of dividends and capital gain.
In the Kenyan setting, corporate governance is one of the upcoming and critical aspects in
terms of development and implementation of corporate strategies and policies since it ensures
that managers maintain high professional code of ethics, this is so because shareholders are
many and they do not have much time, thus employ managers to run firms on their behalf.
Through corporate governance, managers are restricted to mismanagement of funds and
misstatement of accounts for personal benefits. Jensen (1986) concluded that firms which
have high liquidity levels and adequate working capital tend to have high agency costs since
this is a solution to agency problems.
Financing decisions involve how a company utilizes debt and equity to maximize
shareholders’ value with minimal risks, improve its competitiveness and expansion of its
capital structure. A firm establishes appropriate amount of funds needed, project appraisals
and analysis, raises the required funds through bonds, equity and working capital
management. Through appropriate financing mix, the firm’s value increases thus increase in
liability and equity side of the statement of financial position. It is important to understand
that firms in Kenya do have distinct policies from all other firms in developing countries.
This distinction is evident in the tax and bankruptcy codes, existing market for corporate
control and the role the capital market and money market do play. This difference
necessitates a thorough look at the issues from an inclination of Kenya as a developing
economy. This is so because study of multiple firms from same economy do not show a
significant variation in the data collected from them, this is according to Booth et al (2001).
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Currently legislation in business industry globally is shifting from development strategies
towards a greater reliance on importance of research on functioning and financing in the
whole industry (Green, Murinde and suppakitjarak, 2002).
There is empirical evidence derived from research work to support the relationship between
size and capital structure that has shown a positive relationship between the two this is
according to (Al-sakran, 2001, Hovakimian et al 2004). The evidence holds that there is a
high likelihood of a small and medium enterprise to use equity as a source of finance because
most of them lack collateral to back debt instruments. For big firms they consider using high
debt relative to equity because they benefit from tax shield and also they do have large capital
base as well as collaterals to support debt instruments use. Casser and Holmes (2003) and
Hall et al (2004) established a direct relationship between the size of a firm and long term
debt ratio as well as indirect relationship between size of a firm and short term debt ratio.
Debt financed projects increases firm’s obligations while there is less risks faced when
projects are equity financed. From financing decision, the firm is able to invest in profitable
projects that generate return which in turn is paid in terms of dividends. Dhillon (1994)
claimed that shareholders are able to give out funds for future return in terms of dividends
thus increase in firm value in the future, from this argument, shareholders gain twice in terms
of rise in value of shares and dividend received.
Hall et al (2004) argued that growth is likely to place a greater demand of internal funds and
force the firm to debt acquisition. High growth firms will consider debt acquisition relative to
low growth firms this is so because the high growth firms are certain that they will be able to
pay the debts when they fall due compared to low growth firms which are in high risk of
agency problems. Growth rate of firms is boosted by availability of various investment
opportunities. These firms will hold less cash and have low level of net working capital since
funds are directed towards investments thus boosting growth. Increase in shareholders’ value
is achieved in two aspects. Firstly, by generating cash flow and dividing the distribution in
pie chart among stakeholders. It ensures that securities are provided to stakeholders to meet
their desire thus increase in shareholders’ wealth. Secondly it can be achieved, by
strengthening investment and operating decisions thus increasing confidence among
stakeholders.
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It is important to note that the divided policy of a firm informs its capital structure. For firms
which pay high dividends they are forced to go for debt instruments in order to finance their
operation and growth; this is so because they lack enough internally generated funds to fund
their operation and growth. Esperanca et al (2003) For the firms which have a policy which
allow for a small amount to be paid as dividends allows the firm to exhaust the internal funds
before they consider debt acquisition and this enables the firm to have a relative low debt
ratio. Therefore there will be positive relationship between the dividend payment ratio and
the debt ratio. It is also important to appreciate that dividend payment is a sign of good
performance of the company though it becomes a challenge to a firm to decide how much to
pay and when to plough back profits to the business.
The period in which a business has been in operation also informs the capital structure which
the firm in question should adopt. A firm which has been in operational for a long period of
time is believed to have established itself as an ongoing business. This is so because statistics
have shown that most small and medium businesses in Kenya fail between 1 to 3 years of
their operation. The longer the business has been in operation the higher credit rating it is;
this gives it an advantage to acquire debts relative to a newly established firm. The
relationship between firm’s profitability and its capital structure is also a crucial concern to a
firm. A firm which is highly profitable will have enough money generated internally for its
operating need as well as it development compared to a firm which is characterized by low
profitability which may not have enough money to fund its operation and hence will consider
debt acquisition which will result to high debt ratio in the organization.
Institutional investors are crucial when it comes to firm’s ownership and financing decisions
since they have resources and knowledge. They invest heavily in organizations and allocate
adequate funds for agency in order to curb the problem of underinvestment by managers and
even firing managers due to declined performance. Hart and Grossman (1980) found in their
study that institutional investors allocate funds towards monitoring thus control the over and
under investment problems. Optimal investment is achieved if a firm institutes prudent
financing and dividend decisions since increase in share prices indicates growth in firm and
maximization of firm value. Also, Liang and Fenn (2001) argued that individual ownership to
wear two hats in terms of ownership and management. They put more effort in the firm to
ensure it grows and maintain high proportion of ownership in terms of shares. Dividend is
4
used as a tool to control managers’ action of under investing thus negative relationship
between dividend payout and ownership. In support, Verma (1994) examined that
institutional investors prefer dividends distributed in terms of cash to curb the agency
problems.
Financial Leverage determines the extent to which a firm has utilized equity, retained
earnings and debt to finance its operations. Firms establish optimal mix between equity and
debt since high level of debt tends to be costly in terms of repayment and interest thus
increase in the level of liquidation. Donaldson (1961) concluded that firms prefer retained
earnings to equity and to debt. Financial gearing (leverage) is used to describe the way in
which owners of the firm can use the assets of the firm to gear up the assets and earnings of
the firm. Employing debt allows the owner to control greater volume of assets than they
could if they invested their own money only. The higher the debt equity ratio, the higher the
firm equity and therefore the firm level of financial risk. Financial risk occurs due to the
higher proportion of financial obligations in the firms cost structure. The degree of financial
gearing indicates how sensitive a firm’s EPS is to changes in earnings before changes in
interest and taxes (EBIT). Other popular measure is debt to equity ratio, Interest covered ratio
and Debt ratio used as industry standard
The attitude of managers and directors will also inform the kind of capital structure that a
firm will adopt. This is so because if they are risk takers they will go for debt acquisition
relative to risk averse management which will consider use of equity as a means of financing
because it has less risk. It is also important to appreciate management buy-in. when there is
management buy-in, the top management will have special interest of a firm and the kind of
financing decision the firm adopts. This essential factor can inform an indirect or direct
relationship between debt ratio and top management perception. This is so because the
financing decision of a firm purely rests between the shareholders through the board of
directors of a given firm.
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1.2 Statement of the Problem
Equity and Debt financing for a business is primarily made up of owners’ contribution and
funds from lenders. The choice of the combination of this funding is made by the managers
of the businesses who decide whether to borrow, plough back the profits the business has
made, ask the owners to raise more funds to expand the business or to increase the
shareholders’ payout of returns on their investment. The combination of the sources of
business funding is referred to as the capital structure of that business.
This research is aimed at determining how managers of the firms in Kenya combine the
different sources of funding for their businesses and the various factors determining the
financing decision choice. Given the unique characteristics of these economies to determine
whether there exists a relationship between the capital structure and the return on
shareholders’ funding for these firms, as well as the relationship between the macroeconomic
factors of the interest rate and the inflation rate with the capital structure and performance.
Analysis of how the return on borrowed funds compared with the return on assets financed
was also carried out to determine, whether the return on assets warranted the borrowing.
Studies have been done in developed countries and this need to be replicated in developing
countries like Kenya. The research intend to answer the research question, does the debt and
equity financing improve the growth and performance of firms in Kenya?
1.3 Objective of the study
1.3.1 General objective
The general objective of the study was to analyze the effect of various variables on debt and
equity choices of firms in Kenya.
1.3.2The specific objectives of the Study
i. To determine the effect of size of a firm on its debt and equity choice.
ii. To determine the effect of profitability on debt and equity choice.
iii. To determine the effect of attitude of top management on debt and equity choice.
iv. To determine the effect of asset structure on debt and equity choice.
v. To determine the effect of tax on debt and equity choice.
1.4 Research Questions
The following research questions were used as a guideline in the research work;
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i. How does the size of a firm affect its debt and equity choice?
ii. How does profitability of a firm affect its debt and equity choice?
iii. How does the attitude of top management affect debt and equity choice?
iv. How does asset structure of a firm affect its debt and equity choice?
v. How does tax affect debt and equity choice?
1.5 Importance and Value of the Study
The findings of the study will enable shareholders to have an insight and more knowledge on
how to balance their investment portfolio in order to increase returns in terms of capital gain
and increase in share value, management will have insight information pertaining to
financing decisions and growth. They will be able to institute sound policies on financing
choices in order to increase shareholders’ value and minimize the cost of capital thus aid
them in making prudent decisions. The study will also enable government, regulators and
firms to come up with sound regulatory framework to aid firms in their operations. The
findings of the study will aid consultants in delivery of advisory services to their clients
pertaining to financing and growth strategies of the firms since the research is rich in policy
implications.
1.6 Scope and justification of the study
The target population of the study includes all the 60 quoted firms in Nairobi Securities
Exchange in Kenya as at 2013. Firms play a very crucial role in the economy performance of
any country because they inform the tax level and the gross domestic product (G.D.P) of a
country. This reason among other reasons brings the financing decision of a firm into focus;
this is so because for a firm to be successful, its financing decision should be out of question.
A proper financing choice leads to success of a firm and this ends up giving the existing
investor an indication of a growing economy as well as assuring potential investors of a
stable economy.
From the preceding discussion it is evident that matters to do with capital structure (financing
decision) are highly debatable. Green, Murinde and suppakitjarak, (2002) appreciates that
business industry legislation is shifting from developing of strategies to a more research
based approach. Kenya as a developing economy cannot afford to be left behind and hence
the need for an intensive and detailed research on the proper financing decisions of firms.
With total respect to researchers who have done tremendous research work on the debt and
7
equity choices of firms in Kenya, it is crucial to appreciate that because of ignorance, lack of
goodwill and technological challenges facing Kenya as an economy, the firms have not yet
implemented the findings of the previous research studies. Research findings on factors
affecting debt and equity choices of firms in Kenya at this point in time, will be very
instrumental to business entities to contribute towards achieving the blue prints of the vision
2030, as well as competing competitively in the globalized and dynamic business industry.
1.7 Limitation of the study
The researcher in this study expects numerous limitations which may have material effects on
the final finding of the study. The limitations include but are not limited to; variability in
measurements of the secondary data sources, incorporative responses in answering the
questionnaires, inadequate information and time frame.
1.8 Definition of Operational Terms
Debt: An amount of money borrowed by one party from another. Many firms or individuals
use debt as a method for making large purchases that they could not afford under normal
circumstances. A debt arrangement gives the borrowing party permission to borrow money
under the condition that it is to be paid back at a later date. Debt can be represented by bonds,
loans, mortgage and commercial paper as some examples of debt.
Equity: Equity is used when referring to an ownership interest in a business which will
include stockholders equity or owner’s equity. Occasionally, equity is also used to mean the
combination of liabilities and owner's equity.
Debt financing: it is away in which a firm raises working capital or capital expenditure by
selling bonds, bills, or notes to individuals and or institutional investors.
Equity financing: refers to the process of raising capital through the sale of shares in an
enterprise.
Cost of capital: is the cost of funds used to finance a firm. It may refer to cost of debt if the
firm is solely financed using debt or cost of equity if the firm is solely financed using equity.
Profitability: it is the state or condition of yielding profit or gain in a firm.
Size of a firm: the size of the firm is measured as the sales volume and it shows that large
firms’ transparency reduces the undervaluation of new equity issues and encourages the firm
to finance through their own equity.
8
Attitude: is defined as an expression of favor or disfavor toward a person, place, thing or an
event.
Asset structure: it is the existence of assets in tangible form or intangible form hence being
assigned a value in monetary terms.
Agency problem: refers to a conflict of interest inherent in any relationship where one party
in the relationship is expected to act in another’s best interest.
Business finance: refers to acquisition and conservation of capital funds in meeting financial
needs and overall objective of business enterprises.
Expertise: is defined as a special skill or knowledge.
Viability: refers to the ability of an instrument to maintain itself or achieve its potentiality
e.g. debt financing instrument.
Tax: it is a financial charge or other levy imposed upon a tax payer (individual or an
institution) by a state or the functional equivalent of a state top fund various public
expenditure.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
In this chapter, a literature review of various research objectives has been undertaken and is
relevant on a firm’s financing choices. It further presents a review of past studies and the
critical review and lastly it presents the general literature review of the subject matter.
2.2 The effects of firm’s size on its debt and equity choices
Alexander Kursher and Ilya .A (2005) of business school in Stanford University in their
research work on Firm size and capital structure noted that firm size has been empirically
found to be strongly correlated with the firm’s capital structure. They established that most
of firms in the United states of America they use their respective sizes as a control variable in
the capital structure the firm establishes. Strebulaev (2004) held that as the size of a firm
increases, fixed cost become less and less important. In particular, the ratio of fixed costs to
proportional cost in total issuance costs is larger for small firms and attenuates as the firm
size increases. Serkan et al (2011) also observed a statistically relationship between the firm
size and the common stock issue, they further observed that a significant linkage between a
firms size and personal debt. However, financing preferences for set up investment, ongoing
operation and future investments seemed to be independent from the size of the given firm.
Dalbor and Upneja (2002) suggested that long term debt usage shares a positive relationship
with the risk the firm is exposed to and the size. Over and above the risk and debt usage
relationship with the firm size the level of risks the firm engages into will also inform its
capital structure. It is important to appreciate that a firm’s growth is a process which takes
time. Therefore when a firm has attained a big size in the market it means that it has
established itself as an ongoing concern (Al-Sakran, 2001 and Hovakimian et al , 2004), this
enables it to acquire more debt at a considerable cost because it has built confidence with
financial institutions, this will not be the case with the small business enterprises in the
economy who have been in operation for a shorter period of time and information does not
give financial institution full confidence as they are extending fund to them.
10
2.3 The effect of firm’s profitability on debt and equity choice
Profitable firms are believed to face reduced expected cost of financial distress and find
interest tax benefits more important (Frank & Gayol,2009).Therefore, the tax benefits and the
bankruptcy costs perspective predict that profitable firms should use more debt. In addition,
the perception of agency costs is expected that the restraint provided by debt financing is
more valuable for profitable firms since these firms are prone to having stern free cash flow
problems (Jensen, 2009).On the other hand, Deensomsak, Paudyal &Pescetto (2004), argued
that they expect an inverse relationship between profitability and debt financing levels since
the pecking order theory suggests that managers prefer to finance investments internally
because of the informational asymmetry between managers and outside investors. Thus
profitable firms will prefer not to raise external funding in order to avoid potential dilution of
ownership and additional external monitoring. The theory of debt financing and profitability
therefore predicts both a positive relationship which supports trade-off theory and a negative
relationship which supports pecking order theory (Kayo and Kimura, 2011)
2.4 Business Finance
Business finance refers to the funds and monetary support required by an entrepreneur (firm)
for carrying out the various activities relating to his/ her business organization. It is needed at
each and every stage of a business life cycle. For instance, in starting a business, it is essential
for acquiring fixed assets, such as land, building, plant and machinery, etc as well as for
meeting the day-to-day expenses (working capital) in the form of payment of wages and
salaries, purchasing raw materials, etc. In order to successfully operate and expand the
business, funds are necessary for promoting and marketing the product; distributing it to the
prospective consumers; as well as for managing the firm's human resource base. Further, in
the changing business environment marked by increasing competition, additional funds are
desirable for continuous modernization and up-gradation of the business unit.
Good financial management is crucial not only when starting a business but also when
growing it, this makes it undeniably relevant to both managers and academicians (I.M
Pandey.2010). This is so because it is an essential part of the economic and non-economic
activities which leads to the efficient and effective decision making on matters of
procurement and utilization of finance with profitable manner(C.Paramasiran and
T.Subramanian.2004).In modern world, all activities are concerned with the economic
11
activities and very particularly to earn profit, this is not achievable if proper financial
management are not institutionalized(C.Paramasiran and T.Subramanian.2004).Therefore in a
nutshell financial management is geared at achieving maximum profit and maximum wealth
creation. Les R. dlabay Ed.D (2007) noted that getting your finances in order, means that
your business can work more efficiently and put you in a better position especially when you
are seeking for external funding for growth and development. Successfully managing your
finances can create sustainability and growth for your business. Any business has got two
sources of finance mainly debt financing and equity financing.
2.4.1 Debt Financing.
Issuance of debt instrument provides funds to a firm to finance its operations, in return debt
purchasers are promised stream of payment and a variety of other covenants in relation to
corporate behavior such as the value and risk of a firm’s assets. The covenants oblige the firm
to make the payment because if it does not, the covenant gives the debt purchaser the right to
repossess the collateral presented, present a bankruptcy petition before the industrial courts in
case of Kenya and as result remove the firm’s management from their positions. It should be
noted that the process presents barriers to the debt holders which bare them to champion for
proper management of their finances. This is so because some organizations are conservative
and complex to be easily understood (Brigham 2004) but this is mostly to small debt holders.
However large debt holders could enclose some of the information and contract enforcement
problems associated with diffuse debt. They are able to closely monitor activities of top
management because of their big investment to the firm for they can obtain control rights in
case of default or violation of the contract. However, the powers of the large investors in a
firm (creditors) are largely dependent on effectiveness and efficiency of legal and bankruptcy
systems in an economy (I.M Pandey 2010).If the legal system is not able to effectively
identify the violation of the debt contracts and provide the means to bankruptcy and
reorganize firms, then creditors could be disabled by lacking mechanism for exerting proper
management of their funds .Large creditors may also force a firm to forego some of its risk
ventures because creditors share the risk but not the profits of an investments (Myers and
Majlufs, 1984).
12
Choosing the right sources of financing a firm is a decision that will influence a company for
a lifetime. There are three types of capital employed to produce more wealth for a firm i.e.
fixed capital-used to produce the permanent or fixed assets of the business like land,
buildings and equipment, working capital-used to support the small company’s normal short
term operations like paying wages, salaries etc. Growth capital- used to help the firm to
expand or change its direction. Debt financing must be repaid with the interest that is carried
as a liability on the company’s balance sheet and it is normally expensive for small business
firms because of return or trade off. The sources of debt financing are from; commercial
banks (which gives short term loans ,intermediate or long term loans), asset based
lenders(discounting accounts receivables and inventory financing),savings and loans
associations, insurance companies, trade credits, credit unions, stockbrokerage houses,
commercial finance corporations, small business investment companies, local development
companies and small business administration, innovations and research institutions. The
internal methods of financing employed are like; factoring which is the selling of accounts
receivables outright, Leasing assets rather than buying them and credit cards.
2.4.2 Equity Financing
Beer et.al, (2008) defines equity financing as a medium to long term shareholders capital
investment in return of a share of ownership of the firm as well as a yearly proportion of the
firms profit in terms of dividends. According to Kisgen (2006), equity capital is the mode that
enables the equity holders to exert influence and monitor managerial decision continuously
through the board of directors. This gives them an opportunity to take immediate corrective
measures when they spot the initial signs of inefficient utilization of organizational resources.
The equity holders being the residual claimant in the organization have the powers to revise
the employment terms of the top management in the organization (Boateng 2004)
Coordination between the shareholders and top management of an organization decreases
instances of agency problems and effective achievement of the desired performance of an
organization. This kind of coordination is costly relative to price-based systems (Gibson,
2002).
Hall (2002) suggested that strategic assets should be financed using equity finance. Poor
relationship between shareholders and top management can result to agency cost; increased
organizational cost which can lead to poor performance of a firm. Graham (2000) discussed
13
the main cost of equity as tax cost, premium and floatation cost and adverse selection cost. A
collection of these costs affects the overall performance of a firm. Myers and Majluf (2004)
noted that a firm with a single ,all or nothing investment opportunity shows that a symmetric
information increases the cost of equity if the firm is pooled with those of lower quality
resulting to a decline in a firms performance. On contrary Booth, (2002) argued that use of
equity financing by a firm enables it to exert direct control of operation and management of a
firm. Equity financing represents the personal investment of owners in the business. It is
called risk capital because investors assume the risk of losing their money if the business
fails. It does not have to be repaid with interest like debt does and that an entrepreneur must
give out some ownership to outside investors. The sources of equity financing are like;
personal savings, friends and family members’ contributions, private investors, partners
contributions, corporations, venture capital and public stock sale/going public.
2.4.3 Viability of Financial Decision
Global investors have recently faced perfect storm in seeking to achieve their long term
financial goal of having the best choice of debt and equity in financing their firms operations.
Markets have continued to experience episodic, extreme bouts of volatility since the world
changing financial crisis began in the year 2008 in Europe as a result of fears over its
sovereign debt; Kupperman (2012) attributes this situation to yields of bonds by meagers,
which investors might otherwise look for a source of meaningful returns. Most of the firms in
Kenya are focusing and venturing in the international market which makes financing decision
a critical aspect in the success of the business. This leads to the pertinent questions which
firms have to put clear if at all it has to realize its financial goals; are they able to satisfy their
financial need in each market? When an attractive but limited investment opportunity arises,
how does the firm decide on the source of finance and do the top management dealing with
the specific markets equipped with the necessary information about that market (Keizi 2008).
This makes financing decision of great importance to continuity, development and
sustainability of any firm.
2.5 Firm’s Asset Structure
Jensen and Meckling (1976) pointed out the possibility of risk shifting strategies whereby
managers may shift to riskier investments at the expense of bond holders. This agency cost of
debt can be mitigated if the collateral value of asset is high; hence asset tangibility is likely to
14
have a positive relationship with the firm’s leverage level. In the case of bankruptcy a higher
proportion of tangible assets could be used to enhance the salvage value of the firm’s asset.
The lenders of finance are thus, willing to advance credit facilities to firms with high
proportions of tangible assets. Non-debt tax shield and firm’s assets are usually regarded as
proxies for asset tangibility (Harris and Raviv, 1991). Bradley, Jarrel and Kim (1984) argued
that use of non-debt tax shield as a proxy brings about a positive relationship between firm’s
leverage and non-debt tax shields. In contrast, Mutenheri and Green (2003) examined the
determinants of capital structure for firms in Zimbabwe. They observed an indirect
relationship between asset tangibility and leverage levels of firms for the pre-reform period
(1986-1990), however, a strong positive relationship was noted for the post-reform period
(1995-1999). The negative association in the pre-reform period could be attributed to lack of
proper contract enforcement systems associated with underdeveloped capital markets.
Firms with more liquid assets can use them as another internal source of funds instead of
debts leading to lower debt financing levels according to the pecking order theory (Oztein
and Flannery, 2012).In addition managers can manipulate liquid assets in favor of
shareholders against the interest of debt holders. Such manipulation increases the agency
costs of debt financing and reduces debt financing levels (Deesomsak et al., 2004)
2.5.1 Liquidity Risk
Drehmann and Nikolaou(2009) defined liquidity risk as the possibility over a specific time
period a firm will become unable to settle obligations with immediacy. It is a risk arising
from the firm’s inability to meet its obligations when they come due without incurring
unacceptable losses. This risk can adversely affect both the firms’ earnings and its capital
structure and therefore it becomes the top priority of the firm’s management to ensure the
availability of sufficient funds to meet the future demands of providers and borrowers at
reasonable costs. The vulnerability of the firm to liquidity risk is determined by the financing
risk and the market risk. Liquidity risk needs to be monitored as part of the firms –wide
process risk management, taking into account market risk and credit risk to ensure stability in
the balance sheet and dynamic management of liquidity risk. A firm should only attempt this
if it makes good business sense in its financing choice, not to use it as a means of keeping a
float. Jenkinson (2008) stated that a firm may lose confidence from its shareholders and its
reputation become at stake if their funds are at risk and not well managed. According to
(Brunnermeier and Pedersen, 2009) the market liquidity risk refers to the inability to sell
15
assets at or near the fair value, and in the case of a relevant sale in a small market, it can
emerge as a price slump.
The behavior towards liquidity is affected by a firm’s characteristic; a firm liquidity position
is affected by its size, status and the type of products they produce. Allen et al,(1989) the size
affects the attitude of the firm towards wholesale funding including the access opportunity
and the price of the finances obtained(Nyborg et al,2002).Firms size matters because of the
economy and the scope and scale concerning liquidity. Kashyap et al,(2002) a large firm
might have better access to the interbank markets because it has a larger networks of regular
counterparts or a wider range of collaterals. The product types they offer on both assets and
liabilities sides is able to affect the liquidity position thus firms take on demand of debt and
equity needs to hold higher liquidity buffers that can be mitigated if an imperfect correlation
holds.
2.6 Firms Tax Rate
Firms tax rate should influence debt financing since debt interest payments are typically tax
deductible, whereas dividend payments are not (Antonyk and Salzmann, 2014).It is therefore
logical that higher tax rates will imply greater interest tax shield benefits and consequently
induce more debt financing rather than equity financing. This reasoning is the main theme of
pioneering study by Modigliani and Miller (1963) and almost all researchers now believe that
firms taxes should be significant to the debt financing decision of a firm (Huang and Sang,
2006).According to DE Angelo and Masulis (1980), firms that have non-debt tax shield are
not to use fully the debt tax shield that comes from debt interest. In other words firms with
sufficient tax shield benefits from investments or depreciation deductions are likely to use
less debt financing (Kouki and Said, 2012). The argument is that non-debt tax shields are
substitutes for a debt related tax shield. Therefore, the relationship between non-debt tax
shields and debt financing should be negative (Lim, 2012).
2.7 Empirical Studies
The recent empirical studies were geared at establishing the capital structure of firms in
Kenya. Some of those studies are as outlined below;
16
The study conducted by Lucy Wamugo Mwangi,Muathe Stephen Makau and George
Kosembeito examine the relationship between capital structure and performance of non-
financial companies listed in Nairobi Securities Exchange(2014) .They sampled all the 44
non-financial companies listed in the Nairobi Securities Exchange as at December 2012,and
concluded that increased financial leverage has a negative effect on performance as measured
by Return On Capital of a non- financial companies listed in Nairobi Securities Exchange.
The study established that, as a company increases its financial leverage the performance as
measured by return on capital declines contrary to the expectations based on the theory.
Bernard Kamau Gachoka (2013) undertook a study with the objective of establishing the
effect of investment strategies on the financial performance of private equity funds investing
in Kenya. He sampled the 20 listed licensed investment funds in Kenya as at November 2013,
he concluded that venture capital had a positive and significant effect on performance of
private equity funds.
According to research of Evelyn Tempel (2011) to examine the influence of financial
leverage on investment of 68 Danish listed companies over the period 2006 to 2010
concluded that the relationship between long term debts and investment is positive to the
companies in industrial and material sector. However the positive relationship is not strong.
The research conducted by Jackline Adongo (2012) ,to establish the relationship between the
effects of financial leverage on profitability and risk of firms listed at Nairobi securities
exchange for the period 1st January 2007 to 31st December 2011.She concluded that there is a
weak, inversely and direct relationship between financial leverage, profitability and risk
respectfully
Kinyua (2005) did an empirical study on capital structure determinants for small and medium
sized companies in Kenya. The study covered 5 years from 1998 to 2002 and used correlation
and regression to analyze the data collected. The study concluded that; profitability, company
size, asset structure, management attitude towards risk and the lenders attitude toward the
firm in question are the key determinants of capital structure of a firm.
17
Ayot Kenrick Otieno (2013) carried out a research to establish the capital structure of listed
non-financial firms in the Nairobi securities exchange. He concluded that size does affect the
capital structure of a firm and the small and medium enterprises are disadvantage for that
reason he recommended that the government should establish a financial product to aid the
small and medium businesses compete effectively with the large enterprises in the economy.
2.8 Theoretical Review
The choices of equity and debt as a source of financing a business entity in different
economies of the world Kenya included has been one of the most controversial topics in
finance, this has triggered development of various theories on the same subject (Bradley et al,
1994). Myers (2001) also added weight in this controversial topic by noting that there is no
universal theory of debt-equity choices and there is no reason to expect one. The relevant
theories that have been advanced on debt and equity choices of a firm include;
2.8.1 Trade-Off Theory of Capital Structure
Trade off theory refers to the idea that a firm uses to balance between the debt and equity
levels in financing its operation by undertaking a cost benefit analysis of the instruments.
Myers (2001) in his research on capital structure noted that the trade-off theory justifies
moderate debt ratio. This theory narrows its focus to two concepts; cost of financial distress
and agency cost (Pandey, 2005). The theory states that a firm which employs debt instrument
to finance its operation accrues tax shield benefit, at the same time it exposes the firm to
financial distress costs including bankruptcy cost of debt and non-bankruptcy costs which
constitute; increased staff turnover, unfavorable credit terms by creditors, bond and stoke
holders infighting. This leads to marginal decrease in benefit as debt is increased while the
marginal cost increases, so that a firm that is optimizing its overall value will focus on this
trade-off when choosing how much debt and equity to employ in financing its firms’
activities. The theory holds that small firms will rely exclusively on a bank for debt capital.
Hackbarth et al (2007) for weak firms, bank debt dominates any mix of the market and bank
debt regardless of the priority structure. This argument contradicts the notion that small firms
avoid public debt because they lack access to those markets or face prohibitive costs for that
matter. Within the trade-off theory there is a “pecking-order” which hold that bank debts are
preferred to market debt due to the lower implied bankruptcy cost. Hackbarth et al (2007)
18
when the bank holds all ex-post, the desired level of debt tax shield can be achieved by only
the use of bank debt. While Myers (2001) noted that a firm will borrow up to the level where
the marginal value of tax shields is on additional debt is offset by an increase in the present
value of possible cost of financial distress.
2.8.2 Pecking Order Theory of Capital Structure
Pecking order theory was developed to further the capital structure understanding by Myers
and Majluf. Myers and Majluf, (1984) noted that firms have a particular preference order for
capital used to finance their operation that is, firms will prefer internal funds to external
sources of finance and in the event that the external funds are the option available, firms are
likely to consider the safest security first that is, the firm will start with debt, convertible debt
and then equity as the last resort. They further noted that the order of preference reflects the
relative costs of various financing option. Cash& Hughes (1994) on the other hand held that
within the overall pecking order theory, small sized enterprises when compared to the large
enterprises will depend more on holding excess liquid assets to meet discontinuities in
investment programs, depend more on short term debt including trade credit and overdraft,
rely to greater extent on hire purchase and leasing equipment. Therefore in case of small
enterprise financing, Cosh & Hughes (1994) proposed a refinement of the theory due to its
lack of information to assess risk both on individual and collective basis.
2.8.3 Agency Cost Theory
In a research by J.keithMurninghan of Kellogg school of management in north western
university, noted that agency problem is ubiquitous in organizations making employers
vulnerable to employees opportunistic behavior particularly the salaried ones(williamson1985
and Holmstrong 1979). Agency problem dates back 1776 when Adam Smith, (1776) in
wealth of nations noted that ‘being the manager of other people’s money than of their own, it
cannot be expected that you should watch over it with the same anxious vigilance with which
the shareholders watch over their own money. The first principle of economics is that every
agent is actuated only by self-interest (Edgeworth 1881). This quote relate to a central
premise in modern economics of business finance; Homo economicus pursue self-interest
(Sen 1995).This justify that agents will be self-interested, utility maximizers who will not
voluntarily protect or promote their principal’s interest, resulting to improper acquisition of
funds and investment.
19
Lawler, (1971) however hold that incentives and performance are rarely aligned. Agents are
motivated to put their interest before their principles interest. Williamson,(1984) expect that
agents will be opportunistic, possibly with guile by engaging in ex ante and ex post efforts to
lie, cheat, steal, mislead, disguise, obfuscate, feign, distort and confuse. Most organizations ‘
stake holders solve this problem mostly through close monitoring which prove burdensome,
costly and impractical due to several reasons(Eisenhardt Shapiro,2005), mainly information
asymmetry. This kind of solving agency problem leads to creation of new set of agents i.e.
Auditors, controllers, compliance officers and other kind of monitors must be
monitored(Shapiro,2005).Agency problem leads to poor investment decisions, dividend
policy and financing decisions of a firm as they are the primary roles of top
management(Booth,2002).
2.8.4 Information Asymmetry Theory
This theory endeavors top balance between choices of either equity or debt as a source of
finance based on information asymmetry, in most firms in different economies Kenya
included, the outsider and insiders do not have same quantities of information. Various
models have been championed on this regard; Ross (1977), Leland and Pyle (1977) and
Myers and Majluf (1984) all concurred on the fact that managers in any given firm always
have more information regarding their firm relative to others in the market. The short
comings associated with information asymmetry is that, if there is no flow of information
from the organization to the market then there is a high risk of the firm losing part of its share
in the market if not being forced out of the market (Leland and Pyle, 1977, Varian, 1992).
According to Akerlof (1970) and Leland and Pyle (1977), in absence of information flow, the
market may fail to exist or it may perform poorly for it will be regarded as to offer poor
quality goods and services while the firms which have solved the problem of information
asymmetry by proper dissemination of positive and negative information about it will be
regarded as a firm offering high quality products. Given that a firm may try signaling their
true value through its debt levels. Ross (1977) provided a model in which firms would signal
its value through its total debt employed. Ross argument is on the assumption that
management compensation depends on the value of the firm. The value of the firm is in turn
affected adversely by bankruptcy possibilities. Firms which are regarded to offer low quality
20
products should consider low debt use while firms believed to offer high quality products
should consider employing high debt because the market will support it pay off the debt when
due by buying theirs goods or services.
Ross also proposes a fee schedule that a penalty on the management if the firm goes
bankruptcy and its value falls to an extent it cannot cover the debt the firm has acquired. The
schedule also provides some benefits to the management by disseminating a true account of
information of what is taking place in the organization. Ross model implies that the firm will
increase with the leverage since increase in leverage increases the market perception of the
firm’s value. Leland and Pyle (1977) use a signaling approach similar to Ross but they
assume that the business is managed by the owner. They show that an entrepreneur’s
willingness to invest in his own project can serve as a signal of project quality, with value of
the firm increasing with the share of the firm held by the entrepreneur. Therefore the capital
structure of a firm will be related to a firm’s value. Thus the perceived firm value will
increase with an increase in the debt level, confirming the Ross model results. Ross also
established that firms with riskier return will have lower debt levels even in absence of
bankruptcy cost because creditors will have a negative attitude regarding the firm’s capacity
to pay off the debt when it falls due.
2.8.5 Capital Structure Theory
Brigham (2004), Capital structure brings into perspective the means a firm uses to finance is
operation. The means can be through use of debt instrument, share issuance or a combination
of both, David, (1979). Capital structure theory was pioneered by Modigliani and Miller
(M&M) they established that optimal financing mix does not exist and that, what matters in a
firm is the value of the firm’s asset and not the mix employed to finance the firms’ operation.
M & M argued that as more debt is added to the established capital structure of an entity, the
financial risk increases as a result the ordinary shareholders will require a higher return for
the additional risk that they have taken on. Therefore, the benefit of a cheaper debt will
exactly offset by the more expensive equity.
Their conclusion was based on the following assumptions; individual investors can borrow at
the same rate and terms as an entity, taxation is ignored, transaction cost are ignored and
financial distress costs are ignored. Although this statement did not rule out the possible
21
preference of a firm’s owner to a certain type of financing over the other, it had an effect to
the irrelevance of the value of the firm to the means of financing it given a perfect market
(Fischer, Heinkel and Zechner, 1989). Since then a number of theories have been advanced to
expound more on the capital structure, some of the numerous theories which have been
advanced are their arguments are ever debated include; trade off theory and pecking order
theory.
2.9 Conceptual framework
Figure 2.1 Conceptual framework
Independent variable
Dependent variable
Firms Size
Profitability
Attitude of Management
Asset Structure
Corporate Tax
Moderating variable
The figure sought to establish the relationship between independent variables; firm size,
profitability, asset structure, corporate tax and attitude of the management on dependent
variable choice of debt or equity of a firm in Kenya. In the analysis moderating variable,
expertise of a firm to choose the source of finance was also considered.
Debt and Equity
Expertise
22
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter defines the design of the study and the research methods which was used to get
responses from the target population. It further highlights the description of the study
population, the sampling procedures, data collection procedures and data collection
instruments and data analysis.
3.2 Research Design
In order to find the best financing choice for a firm in Kenya, this research study used a
Correlation and analytical research designs. This research design was used to collect a snap
shot of data and analysis of the relationship between the study variables. The design was
more appropriate because it enabled respondents to give their relevant information on the
issue of interest and findings to enable one to determine the best financing choice of a firm in
Kenya (Cooper &Schindler, 2003).
3.3 Population of the Study
According to Mugenda and Mugenda (2003), a population is well-defined as all set of people,
service, elements and events, group of things or households that are being investigated under
the study. Target population in statistics is the specific population about which information is
desired. The target population of interest in this study consisted of 60 listed firms in the
Nairobi Securities Exchange as at December 2013.
23
Table 3.1 Target Population
LEVEL TARGET
POPULATION
THE
SAMPLE
SIZE
PERCENTAGE
OF SAMPLE
POPULATION
Banking 10 3 15%
Insurance 6 2 10%
Construction & Allied 5 2 10%
Manufacturing & Allied 9 3 15%
Investment 4 1 5%
Agricultural 7 3 15%
Energy and Petroleum 4 1 5%
Telecommunication &Technology 2 1 5%
Automobiles and Accessories 4 1 5%
Commercial and Services 9 3 15%
TOTAL 60 20 100%
Source: Research data 2015
All items in any field of inquiry constitute a universe or a population. Complete enumeration
of all items in the population is known as a” census inquiry”. The researchers undertook a
sample study of 20 firms out of 60 targeted public firms as at 31st December 2013.It was
presumed that in the sample inquiry, all items were covered, thus no element of chance was
left and the highest accuracy was obtained. The researchers targeted financial
managers/controllers depending on the organizational structure of the firm.
3.4 Sampling Design
Due to variability of characteristics among items in the population, we applied probability
sample design in the sample selection process to reduce the distortion view risk of the
population and made inferences about the population based on the information from the
sample survey data. According to Mugenda and Mugenda (2003), a sample ratio of 0.3 was
used to obtain sample representation of all respondents. In this case, twenty (20) public listed
firms were subjected to the study. Only the sampled population was subjected to the data
gathering exercise to provide the necessary information to the study.
24
3.5 Data Collection
The two sources of data collection used were primary and secondary data. Primary data used
was obtained by administering questionnaires to the sampled firms through drop and pick
later and in some instances the researcher discussed the contents of the questionnaire with the
respondents and left them to be filled at their own time. Secondary sources were used to
provide information and data from published annual reports and financing sources of firms
spanning five years. In this study questionnaire and abstraction methods was used in data
collection. Primary data was used to collect data directly from respondents. It consisted of
questions on expertise and the attitude of top management. Abstraction method was used to
collect secondary data from published reports and statements provided by sampled firms. In
order to increase reliability of the findings, a combination of data from secondary and
primary sources was used.
3.6 Data Analysis
Regression was performed to establish the significant differences and relationship between
the independent variables (firm size, profitability, tax implications and asset structure) and
the dependent variables of debt and equity, observation of the data was also applied. SPSS
(statistical package for social scientist) software was used in the analysis of quantitative data.
The results from the annual financial reports and other documentations were presented in
form of tables, charts, graphs, and narrative statements.
The Regression Equation
𝐸𝑎𝑓 = 𝜶 + 𝑏1𝒙𝟏 + 𝑏2𝒙𝟐 + 𝑏3𝒙𝟑 + 𝑏4𝒙𝟒 + ℇ
𝐷𝑎𝑓 = 𝜶 + 𝑏1𝒙𝟏 + 𝑏2𝒙𝟐 + 𝑏3𝒙𝟑 + 𝑏4𝒙𝟒 + ℇ
Where:
𝑬𝒂𝒇= Equity of a firm
𝑫𝒂𝒇= debt of a firm
𝜶 = A constant
𝒙𝟏= Profitability of a firm
𝒙𝟐= Tax effect of a firm
25
𝒙𝟑= Asset structure
𝒙𝟒=Firm size
ℇ= Standard error
𝒃𝟏 , 𝒃𝟐, 𝒃𝟑& 𝒃𝟒=Are the beta coefficients
3.7 Reliability and Validity of Tests
Content validity and reliability was assured that each question in the questionnaire is valid
and correctly structured for ease of understanding. Moreover, the secondary data to be
reviewed had to be recent and up to date as well as containing relevant contents. To ensure
reliability, the researchers had to pre-test the questionnaires using three firms. The purpose of
the pilot study was to enable the researchers to improve on the reliability of the data
collecting instruments and to familiarize with their organization structure /administration.
Pre-testing was to provide a check on the feasibility of the proposed procedures for coding
data and showing up flows and ambiguities in the instruments of data collection. It yielded
suggestions for improving data collecting tools as per, Masibo (2005).
On the other hand the content validity of the two instruments of data collection was assured
by ensuring that each of the items in the questionnaire addressed specific content and
objectives of the study. Moreover, the instruments were given to three public firm experts
who assessed the concepts which the instruments were trying to measure. The end result was
that the instruments were appropriate in terms of content validity. The validity and reliability
of the tools for data collection were eventually ascertained and used to collect data from the
sampled respondents/firms.
26
CHAPTER FOUR
DATA ANALYSIS AND PRESENTATION OF FINDINGS
4.1 Introduction
The main objective of this study was to analyze the factors affecting debt and equity choices
of listed firms in Kenya. A total of 20 questionnaires were sent out, of which 19 of them were
satisfactorily filled and returned, this formed 95% response rate. In order to achieve the
objective of the study, the entire set of data was analyzed using the statistical package for
social scientist (SPSS). In this chapter we analyzed the results and concluded by giving a
summary and interpretation of the findings.
We assessed the validity and reliability of data by reviewing the interrelationship among
dependent variables (Debt and Equity) and the independent variables (firm size, profitability,
attitude of the top management, asset structure and corporate tax).
4.2 Background Information of the Study Respondents
This section presents a brief description of the demographic features of the sampled
respondents engaged in the study. The description is of immense importance for it will enable
the researchers to better understand their respondents as well as laying the platform for
detailed discussion of the results based on the stated objectives of the study. The
demographic features consist of the following: Response rate, Gender, age, level of
education, years of experience and the position held in the organization of interest.
27
Table 4.1 Demographic Data
Source: Research Data 2015
No Questions Answer categories Aggregate No
1. Issuance 1. Questioners issued
2. Questioners returned
20
19
2. Response rate 1. Responses
2. Non response
19
1
3. Gender respondents 1.Male
2. Female
12
7
4. Respondents Age bracket 1. 18-28 years
2. 28-38 years
3. 38-48 years
4. Above 48 years
2
3
9
5
5. Respondent’s highest education level? 1. Primary
2. Secondary
3. College Polytechnic
4. University
0
0
1
18
6. For how long have you been employed
(in years)?
1. Less than 1 year
2. 1-5 years
3. 5-10 years
4. Over 10 years
0
4
12
6
7. Respondents working in their current
organization?
1. Less than 1 year
2. 1-5 years
3. 5-10 years
4. Over 10 years
0
4
13
2
8. Respondents position 1. Top management
2. Middle management
3. Support staff
4
13
2
28
4.2.1 Respondents Genders
The questionnaires required the respondent to indicate his or her gender. It was established
that, of the total number of respondents 63% were men and 37% were women. This is
represented in the figure below:
Figure 4.1 Respondents Gender
Source: Research data 2015
4.2.2 Respondents age bracket
As researchers we were also interested with the distribution of age bracket of our respondents
from the sampled firms, the study found out that of the total respondents engaged 11% were
aged 18-28 years, 16% aged between 28-38years, 47% aged between 38-48 years and 26%
were above 48 years as illustrated in the figure below:
Figure 4.2 Respondents Age Bracket
Source: Research Data 2015
18-28 years 28-38 years 38-48 yearsAbove 48
years
11%
16%
47%26%
63% Male
Female 37%
Respondents Gender
1st Qtr
2nd Qtr
29
4.2.3 Level of Education
We sought to establish the respondent’s highest level of education. The findings were as
follows: there was 0% of respondent with primary education has their highest level of
education, 0% with secondary education as their highest level, 5% with College Polytechnic
as their highest education level and 95% with university as their highest level, this is
demonstrated using the figure below.
Figure 4.3 Level of Education
Source: Research Data 2015
4.2.4 Respondents Years in Employment
As illustrated below, majority of our respondents (53%) had work experience of between 5-
10 years, then 32% had worked for more than 10 years, 16% had worked for between 1-5
years and none (0%) of our respondents had a work experience of less than one year.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Primary Secondary College polytechnic University
0% 0%5%
95%
30
Figure 4.4 Respondents Years in Employment
Source: Research Data 2015
4.2.5 Respondents position in their work place
In the last segment of the demographic data we sought to establish the various positions our
respondents hold in the sampled firms. The table below illustrates our findings.
Figure 4.5 Respondents position in their work place
Source: Research Data 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
less than 1 year 1-5 years 5-10 years above 10 years
0%16%
53%
32%
21%
68%
11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Top management Middle management support staff
31
4.3 Factors Affecting Debt and Equity Choices of Firms in Kenya
The general objective of the study was to determine the factors affecting debt and equity
choices of firm in Kenya. To achieve this end, we asked the respondents to indicate the extent
to which they believe attitude of the top management affect debt and equity choices of firms
in Kenya.
4.3.1 Attitude of the Top Management
The extent scales with very great extent (V.G.E), great extent (G.E), moderately (M), small
extent (S.E) and not at all (N.A) was used. The results are tabulated below in table 4.1
Table 4.2 Attitude of the top management
VARIABLE 1
(V.G.E)
2
(G.E)
3
(M)
4
(S.E)
5
(N.A)
1 To what extent does the attitude of top
management influence them to use
debt financing?
6
3
1
0
9
2 To what extent does the attitude of top
management inform them to use equity
financing?
3
3
0
1
10
3 To what extent does attitude of top
management fail to influence their
debt and equity choice?
3
0
0
2
14
4 To what extent does the top
management influence the financing
decision of a firm?
16
2
1
0
0
5 To what extent does the attitude of top
management vary when they are
making decisions on various issues?
1
1
3
3
11
Source: Research Data 2015
The response showed that the attitude of the top management had a very great extent effect to
debt and equity choices of firms in Kenya. Eighty five percent (85%) had a view that the
attitude of the top management do affect debt and equity choices of firms in Kenya, 30% of
the total respondents noted that risk averse managers will consider using equity to debt, while
32
risk seekers (risk takers) management will consider more debt to equity and 15% of the total
number of respondents held that, the risk neutral managers do not have a specific form of
financing they value over the other.
4.4 Discussion of findings
4.5 Effect of Various Factors on Debt and Equity Choices
The following tables give a summary of the descriptive statistics (mean and standard
deviation).
Source: Research Data 2015
The descriptive data show that firm size had an average score of 48468.35 and a standard
deviation of 84777.04126 indicating the spread away from the mean, the mean of asset
structure was 2.1287 and its standard deviation was 2.29343 which indicated a small
deviation from the mean. Profitability had a mean of 0.2431 and a small gap deviation shown
by a standard deviation of 0.19985.Corporate tax had a mean of 1084.11 and a standard
Table 4.3 Descriptive Statistics
Mean
Std.
Deviation
N
Equity 14540.4100 22183.27058 100
Firm Size 48468.3500 84777.04126 100
Asset Structure 2.1287 2.29343 100
Profitability .2431 .19985 100
Corporate Tax 1084.1100 1783.79000 100
Source: Research Data 2015
Table 4.4 Descriptive Statistics
Mean Std.
Deviation
N
Debt 5846.3300 13523.87147 100
Firm Size 48468.3500 84777.04126 100
Asset Structure 2.1287 2.29343 100
Profitability .2431 .19985 100
Corporate Tax 1084.1100 1783.79000 100
33
deviation of 1783.79 which means that there is a gap between the two descriptive measures of
the data.
4.6 The Relationship between Independent Variables on Debt and Equity Choice
We sought to find out the relationship between the various independent variables (firm size,
asset structure, profitability and corporate tax) on debt and equity choices. The results are as
tabulated in table 4.5 below.
Table 4.5 Pearson Correlation
Equity Firm Size Asset
Structure
Profitability Corporate
Tax
Equity 1.000
Firm Size .754 1.000
Asset Structure -.201 -.149 1.000
Profitability .142 .061 -.266 1.000
Corporate Tax .758 .689 -.244 .546 1.000
Source: Research Data 2015
Table 4.6 Pearson Correlation
Debt Firm Size Asset
Structure
Profitability Corporate
Tax
Debt 1.000
Firm Size .545 1.000
Asset Structure -.084 -.149 1.000
Profitability -.061 .061 -.266 1.000
Corporate Tax .348 .689 -.244 .546 1.000
Source: Research Data 2015
The results established a positive relationship between firm size and equity as a choice of
0.754 as well as a positive relationship between firm size and debt as a financing choice of
0.545. Asset structure and equity were found to have a negative relationship of -0.201 while
asset structure and debt showed a negative relationship of -0.084. Profitability and equity
resulted to a positive relationship of 0.142, while profitability and debt showed a negative
relationship of -0.061. Corporate tax had a positive relationship with both debt and equity of
0.348 and 0.758 respectively. Firm size and profitability had a positive relationship of 0.061,
profitability and asset structure had a negative relationship of -0.266, asset structure and firm
34
size also showed a negative relationship of -0.149, corporate tax and firm size showed a
positive relationship of 0.689, corporate tax and asset structure showed a negative
relationship of -0.244 while corporate tax and profitability had a positive relationship of
0.546.
4.7 Effects of Various Variables on Debt and Equity Choices of a Firm in Kenya
We sought to establish the debt and equity choices of firms in Kenya and especially the firms
listed in the Nairobi securities exchange because they formed our target. To establish this end
return on capital employed (ROCE) was calculated for all the sampled firms with an end to
ascertain the specific firms profitability, on the other hand the financial position statements of
the 20 firms was also closely scrutinized to establish the specific firms total assets, liquidity
ratios and corporate tax which informed us on the; firm size, asset structures and corporate
tax respectively of the individual firms sampled. The below model was used to establish the
effect of the various factors on debt and equity choices.
𝑬𝒂𝒇 = 𝜶 + 𝑏1𝒙𝟏 + 𝑏2𝒙𝟐 + 𝑏3𝒙𝟑 + 𝑏4𝒙𝟒 + ℇ
𝑫𝒂𝒇 = 𝜶 + 𝑏1𝒙𝟏 + 𝑏2𝒙𝟐 + 𝑏3𝒙𝟑 + 𝑏4𝒙𝟒 + ℇ
The results were tabulated and discussed below;
Table: 4.7 Regression Results for Factors Affecting Debt Financing Choice
Model Unstandardized
Coefficients
Standardized
Coefficients
T
Sig. B Std. Error Beta
(Constant)
Profitability
Tax
Asset
structure
Firm size
4021.625
-9344.545
.542
-168.799
.080
2611.400
8190.465
1.244
527.024
.022
-.138
.071
-.029
.500
1.540
-1.141
.435
-.320
3.625
.127
.257
.664
.749
.000
Source: Research Data 2015
35
Table: 4.8 Regression Results for Factors Affecting Equity Financing Choice
Model Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
(Constant)
Profitability
Tax
Asset structure
Firm size
10235.834
-30435.689
8.705
-598.107
.073
2754.066
8637.927
1.312
555.817
.023
-.274
.700
-.062
.279
3.717
-3.523
6.633
-1.076
3.144
.000
.001
.000
.285
.002
Source: Research Data 2015
We sought to test the relationship of the independent variables (profitability, tax, asset
structure and firm size) on the dependent variables (debt and equity) by regression of
independent variables against the dependent variables each at a time, where t-test was used to
test the significance of each predictor variables (profitability, tax, asset structure and firm
size) in the model.
4.7.1 Relationship between profitability, debt and equity choice
The significance levels between firm’s profitability and the use of debt is indicated by t-value
of -1.141 and sig of 0.257 which indicates a low significance level compared to 0.05, while
the relationship between the use of equity financing and profitability is indicated by t-value -
3.523 and a sig level of 0.001 relative to the established significance level of 0.05 which is a
very high relationship.
This means that a firm which is highly profitable will not go for either of the two forms of
financing because it can be able to finance its operation by the use of the earned profit, this is
a strong argument mostly when we are referring to equity financing but at times the firm if it
is at extreme need of financing it will go for debt financing because it is convinced that the
internally generated fund can repay the debt instrument. This was in line with the argument
36
made by Deensomsak, Paudyal&Pescetto (2004), argued that they expect an inverse
relationship between profitability and debt financing levels since the pecking order theory
suggests that managers prefer to finance investments internally because of the informational
asymmetry between managers and outside investors. Thus profitable firms will prefer not to
raise external funding in order to avoid potential dilution of ownership and additional
external monitoring
4.7.2. Relationship between corporate tax and debt and equity choices
The Relationship between the use of both debt financing and equity financing and the
corporate tax level has a sig level of .664 and 0.00, This relationship is strongly significant to
the use of equity and less significance to the use of debt at a significance level of 0.00 and
0.664 respectively against significance level of 0.05. This means that tax levels is directly
proportional to the use of both forms of financing (debt and equity) but as tax goes up it
discourages use of equity financing.
The interpretation of the analysis of the data from the sampled firms was not consistent with
the observation made by Lim, 2012 that the relationship between non-debt tax shields and
debt financing should be negative.
4.7.3. Relationship between asset structure and debt and equity choices
There is a negative relationship between the use of debt and equity financing and the asset
structure of a firm indicated by t-values of -0.32 and -1.076 respectively, at the same time
there is less significance between the use of debt and equity choices indicated by significance
levels of 0.749 and 0.285 respectively against the significance level of 0.05. This means that
the liquidity level of a firm will not significantly influence the use of either of the two forms
of financing its operation.
The interpretation of the data was consistent with the observation made by Mutenheri and
Green (2003) that examined the determinants of capital structure for firms in Zimbabwe and
noted indirect relationship between asset tangibility and leverage levels of firms for the pre-
reform period (1986-1990).
4.7.4 Relationship between firm size and debt and equity choices
The data analysis shows a positive relationship between the use of debt and equity financing
and the firm size indicated by the t-value of 3.144 and 3.625 respectively. There is also a
strong significance of the use of debt and equity financing indicated by the significance levels
37
of 0.002 and 0.000 respectively against the established significance level of 0.05. This means
that a firm will increase the use of the two forms of financing as the firm size increases.
This statistical relationship concurred with the observation made by Serkan et al (2011) that
there is strong relationship between the firm size and the common stock issue, they further
observed that a significant linkage between a firms size and personal debt.
38
CHAPTER FIVE
SUMMARY, CONCLUSION & RECOMMENDATION
5.1 Introduction
The aim of this chapter is to link and apply the results obtained from the study, to solve and
answer the problems facing most firms in Kenya. It also helps in making financing choices by
the use of the two main sources of finance (debt and equity). The chapter will elucidate the
policy recommendation that the policy makers in various organizations can apply to better
their financing choices.
5.2 Summary and Conclusions
The main objective of this study was to establish the effect that various variables have on
debt and equity financing choice of firms listed at the Nairobi Securities Exchange. To
achieve this objective the researchers sampled firms listed under the Nairobi securities
exchange that exhibited the characteristics for the study. Secondary data was used in this
study. Data was collected through reviewing of documents such as annual published reports
and published books of accounts of the sampled companies.
The study establishes that it is of utmost importance for finance managers and the top
management of a firm to understand the various effects of the variables used in this study
such as; attitude of the top management, firm size, asset structure, corporate tax level and
profitability do have on the financing choice they choose to use.
The study established that profitability, liquidity and asset structure do have an indirect
relationship with the use of both debt and equity. This means that as the liquidity of a firm
goes down the firm will refrain from debt as well as equity use as a means of financing .This
is so because the firm is not able to adjust itself to pay off the debts as and when they fall due.
On the other hand it will not employ equity financing which brings in more diverse control
making the management of the firm difficult. Thus, it has to undertake long term measures so
as to correct the liquidity problem which can take quite a considerable period of time.
It also established that as the firm grows it will employ more of debts and more equity
finances. This is because as the firm grows it will need a lot of funds to finance its operations
as well as the development needs, such as new market analysis, new plants and machinery,
39
new premises and the high cost of employing the current technology. It will also need to have
a competitive edge in the market compared to its initial requirements.
The data showed that profitable companies will reduce their use of both debt and equity
because they are in a position to finance their operations with the internally generated funds.
If they have to employ external funding they will consider the use of debt because they are
convinced beyond reasonable doubts that they are able to pay off the debt value as and when
it falls due. They will not employ equity because this form of financing is believed and
proved to increase control spread of a firm which does not favor its management. Debt and
equity control engages the firm in a long term obligation of growing their capital gain as well
as paying the share holders dividend after every financial year.
The corporate tax level was found to have a strong relationship with the debt financing choice
of a firm and less significant relationship with the use of equity financing. This proved that
corporate tax level is directly proportional to both debt and equity financing choice. This
means that as the tax goes up it discourages the use of equity financing choice as it makes it
more expensive for the investors. The interpretation of the analysis of the data from the
sampled firms was not consistent with the observation made by Lim, 2012 that the
relationship between non-debt tax shields and debt financing should be negative.
The data analysis showed that the attitude of the top management has a great influence on
making decision on financing choice to be adopted by the firm in Kenya. From the data
collected a greater percentage are risk seekers and they supported debt financing as compared
to risk averse who supported equity financing in making their choices of financing a firm.
5.3 Policy Recommendations
It was considered to be very important when the finance managers/controllers are funding
their firm’s assets to understand the impact of various variables on their choice of debt and
equity financing. This was evident from the study and analysis arising thereof. This study
established that analysis of dependent variables and analysis of independent variables when
used well can help to boost firm’s competitive advantage and consequently profitability. In
addition the capital market analyst as well as investment analyst should advise the investors
as well as firms on the best financing choice to be taken based on the structure analysis.
Borrowing induces risk to the company and on the return on shareholders in terms of
reducing the amount of profit available to them. It also exposes their assets to dissolution in
40
the event they fail to pay debt in the stipulated time. When the firm’s returns are likely to fall
significantly, the use of debt increases their risk. Adequate emphasis should be put in place
on enabling those firms to employ more of shareholders funding than debt and thus reduce
the risk that is inherent in the increased use of debt. Based on the results of the study the
following recommendations were made.
5.3.1 Use Equity rather than Debt
The conclusion that debt financing does not always improve a firm’s performance leads to the
recommendation that firms should use shareholders funds as much as possible before they
undertake to borrow debts. This is to minimize the risks related to the use of debt financing
which includes interest on debt exceeding the return on assets they are financing. Firms must
therefore be encouraged or assisted to obtain equity by listing on exchanges. This can be done
by educating and sensitization of business owners of the benefits of listing as well as granting
of special fiscal measures to encourage them to list.
5.3.2 Consider the Firms Asset Structure
When a firm has exhausted its equity financing choice through shareholders funds and
chooses to finance its expansion of operations by borrowing, special conclusion must be
taken to ensure that the assets financed brings in a higher returns than the interest the firm is
required to pay on the debt. If this is not done, the firm will erode the reserves in order to
repay the debt as the assets financed will not be making enough returns to cover the debt.
5.4 Limitations of the Study
The researchers encountered quite a number of challenges related to the research and most
particularly this research under constrains of finances. In addition Nairobi Securities
Exchange analysts had to be pushed to us assist with data. This was done through many calls
and visits to remind them. Others wanted to be paid in order to give data. Others thought that
the information they were requested to volunteer was confidential.
Time allocated for the study was insufficient while holding a full time job and studying part
time. This was encountered during the collection of material as well as the data to make the
study a success. However, the researchers tried to conduct the study within the time frame as
specified.
41
5.5 Suggestions for Further Studies
Arising from this study, the following directions for future research in Finance were
recommended as follows:
First, the study focused on all the 60 listed firms in the Nairobi Securities Exchange.
Therefore, generalization could not adequately be extended to every listed firm as they have
varying industry risk, different management, and different asset structures. Based on these
facts among others, it is therefore recommended that narrow based study covering a specific
segment or firm be done to find out the impact of firm size, profitability, attitude of top
management cost of capital asset structure and corporate tax on debt and equity financing
choice.
Similar studies to this can also be conducted or replicated in a few years to assess if the
impact of firm size, profitability, attitude of top management cost of capital asset structure
and corporate tax on debt and equity financing choice on firms listed at the Nairobi Securities
Exchange has changed as the Nairobi Securities Exchange continues to change. Also debt and
equity financing on corporate strategy is also another area of interest which can be under the
area of further research and more intense study along that area can come in handy.
The study was done for the firms operating in Kenya and researchers suggested that a cross
sectional study be done for the other East African firms listed at the Stock Exchanges.
42
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46
APPENDIX I: QUESTIONNAIRE COVER LETTER
FACTORS DETERMINING DEBT AND EQUITY CHOICES QUESTIONNAIRE
Egerton University,
Faculty of Commerce,
Department of Accounting, Finance and Management Science,
P.O Box 536-20115,
EGERTON
Dear: Sir/Madam,
RE: REQUEST FOR RESEARCH DATA
We are undergraduate students at Egerton University, Faculty of commerce specializing in
banking and finance. In order to fulfill the degree requirements, we are undertaking a
management research project on the “Factors Determining Debt and equity choices of
firms in Kenya”. To achieve the above goal, we have identified your organization as one of
the institutions from where relevant data will be obtained. The information given to us will be
treated with confidentiality and will be used for academic purpose only. Suppose you have
any enquiries or comment regarding this project, you are free to contact us directly on the
contacts given below. Your cooperation will be highly appreciated.
Yours faithfully,
[email protected] Patrick Musyoka 0726383654 ------------------
[email protected] Josephine Muindi 0726617189 -------------------
[email protected] Jones Nyabicha 0722235281 -------------------
[email protected] Sarah Oira 0722686023 -------------------
[email protected] GrantonMwambingu 0720642960 -------------------
[email protected] Gilbert Kosgei 0720700075 -------------------
[email protected] Caroline Maina 0711911237 -------------------
[email protected] James Wakori 0727415604 -------------------
[email protected] Peter Wafula 0725787201 ------------------
evansmutha [email protected] Evans Muthama 0717170693 ------------------
Or email: [email protected]
47
APPENDIX II: QUESTIONAIRE
INSTRUCTIONS
Please answer all the questions honestly and exhaustively by ticking (√) the correct answers
in the space provided. All the information given will strictly be used for academic
purpose/research only and will be treated with utmost confidentiality.
SECTION A: DEMOGRAPHIC DATA
This section of the questionnaire refers to background or biological information. Although we
are aware of the sensitivity of the questions in this section, the information will allow us to
compare group’s respondents. Once again we assure you that your response will remain
anonymous. Your co-operation is much appreciated.
No Questions Answer categories Tick
1. Gender 1.Male
2. Female
[ ]
[ ]
2.
Age bracket
1. 18-28 years
2. 28-38 years
3. 38-48 years
4. Above 48 years
[ ]
[ ]
[ ]
[ ]
3.
Which is your highest education level?
1. Primary
2. Secondary
3. College Polytechnic
4. University
[ ]
[ ]
[ ]
[ ]
4.
For how long have you been employed
(in years)?
1. Less than 1 year
2. 1-5 years
3. 5-10 years
4. Over 10 years
[ ]
[ ]
[ ]
[ ]
`5. For how long have you been working in
your current organization?
1. Less than 1 year
2. 1-5 years
3. 5-10 years
4. Over 10 years
[ ]
[ ]
[ ]
[ ]
6. In what category are you working in? Top management
Middle management
Support staff
[ ]
[ ]
[ ]
48
SECTION B: DEBT AND EQUITY CHOICE OF A FIRM.
Perceptions: The following statements deal with the perceptions experienced from debt and
equity choice of a firm. Please, show the extent to which these statements reflect your
perception towards debt and equity financing choice to a firm. The questions are ranked on a
four likert scale ranging from 1.Very great extent (V.G.E) 2. Great extent (G.E), 3.Moderate
(M),4. Small extent (S.E) 5.Not at all (N.A), please tick one that corresponds with your likert
scale.
B. MANAGEMENT ATTITUDE
VARIABLE 1
(V.G.E)
2
(G.E)
3
(M)
4
(S.E)
5
(N.A)
1 To what extent does the attitude of top
management influence them to use
debt financing?
[ ]
[ ]
[ ]
[ ]
[ ]
2 To what extent does the attitude of top
management inform them to use equity
financing?
[ ]
[ ]
[ ]
[ ]
[ ]
3 To what extent does attitude of top
management fail to influence their
debt and equity choice?
[ ]
[ ]
[ ]
[ ]
[ ]
4 To what extent does the top
management influence the financing
decision of a firm?
[ ]
[ ]
[ ]
[ ]
[ ]
5 To what extent does the attitude of top
management vary when they are
making decisions on various issues?
[ ]
[ ]
[ ]
[ ]
[ ]
Source: Research Data 2015
END OF QUESTIONNAIRE
Thank you in advance for your valuable information and co-operation.
53
APPENDIX VII: LISTED FIRMS
TARGET POPULATION OF QUOTED FIRMS.
BANKING
1. Barclays Bank Ltd Ord. 2.00
2. National Bank of Kenya Ltd Ord.5.00
3. Kenya Commercial Bank Ltd Ord.1.00
4. Housing Finance Co Ltd Ord.5.00
5. CFC Stanbic Holdings Ltd Ord.5.00
6. Standard Chartered Bank Ltd Ord.5.00
7. Equity Bank Ltd Ord.0.50
8. The Co-operative Bank of Kenya Ltd Ord.1.00
9. NIC Bank Ltd Ord.5.00
10. Diamond Trust Bank Kenya Ltd Ord.4.00
INSURANCE
11. Jubilee Holdings Ltd Ord.5.00
12. Pan Africa Insurance Holdings Ltd Ord.5.00
13. CIC Insurance Group Ord.1.00
14. British American Investments Company(Kenya) Ltd Ord.0.10
15. CFC Insurance Holdings
16. Kenya Re-Insurance Corporation Ltd Ord.2.50
CONSTRUCTION AND ALLIED
17. Bamburi Cement Ltd Ord.5.00
18. E.A.Portlant Cement Ltd Ord.5.00
19. E.A Cables Ltd Ord.0.50
20. Athi River Mining Ord.5.00
21. Crown Berger Ltd Ord. 5.00
MANUFACTURING AND ALLIED
22. British American Tobacco Kenya Ltd Ord.10.00
23. Carbacid Investment Ltd Ord.5.00
24. East African Breweries Ltd Ord.2.00
25. Mumias Sugar Co Ltd Ord.2.00
26. Unga Group Ltd Ord.5.00
54
27. Kenya Orchards Ltd Ord.5.00
28. B.O.C Kenya Ltd Ord.5.00
29. Eveready East Africa Ltd Ord.1.00
30. A. Baumann Co Ltd Ord.5.00
INVESTMENT
31. Centum Investment Co Ltd Ord.0.50
32. Olympia Capital Holdings Ltd Ord.5.00
33. City Trust Ltd Ord.5.00
34. Trans-Century Ltd
AGRICULTURAL
35. Kakuzi Ord.5.00
36. Limuru Tea Co Ltd Ord.20.00
37. Rea Vipingo Plantations Ltd Ord.5.00
38. Eaagads Ltd Ord.1.25
39. Sasini Ltd Ord. 1.00
40. Kapchorua Tea Co Ltd Ord.5.00
41. Williamson Tea Kenya Ltd Ord.5.00
ENERGY AND PETROLEUM
42. Kenolkobil Ltd Ord. 0.05
43. Total Kenya Ltd Ord.5.00
44. KenGen Ltd Ord. 2.50
45. Kenya Power & Lighting Co Ltd Ord.
TELECOMMUNICATION AND TECHNOLOGY
46. Access Kenya Group Ltd Ord.1.00
47. Safaricom Ltd Ord.0.05
AUTOMOBILES AND ACCESSORIES
48. CMC Holdings Ltd Ord.0.50
49. Sameer Africa LtdOrd.5.00
50. Car and General (k) Ltd Ord.5.00
51. Marshalls(E.A) Ltd Ord.5.00
COMMERCIAL AND SERVICES
52. Kenya Airways Ltd Ord.5.00
53. Nation Media Group Ord.2.50
55
54. Standard Group Ltd Ord.5.00
55. Express Ltd Ord.5.00
56. TPS Eastern Africa(Serena) Ltd Ord. 1.00
57. Uchumi Supermarket Ltd Ord.5.00
58. Hutchings Biemer Ltd Ord.5.00
59. Longhorn Kenya Ltd
60. Scan group Ltd Ord.1.00
Source: Research 2015, NSE
56
APPENDIX VIII: SAMPLED FIRMS.
BANKING
1. Barclays Bank Ltd Ord. 2.00
2. Kenya Commercial Bank Ltd Ord.1.00
3. Equity Bank Ltd Ord.0.50
INSURANCE
4. Jubilee Holdings Ltd Ord.5.00
5. CIC Insurance Group Ord.1.00
CONSTRUCTION AND ALLIED
6. E.A.Portlant Cement Ltd Ord.5.00
7. Athi River Mining Ord.5.00
MANUFACTURING AND ALLIED
8. British American Tobacco Kenya Ltd Ord.10.00
9. East African Breweries Ltd Ord.2.00
10. Eveready East Africa Ltd Ord.1.00
INVESTMENT
11. Trans-Century Ltd
AGRICULTURAL
12. Kakuzi Ord.5.00
13. Limuru Tea Co Ltd Ord.20.00
14. Sasini Ltd Ord. 1.00
ENERGY AND PETROLEUM
15. KenGen Ltd Ord. 2.50
TELECOMMUNICATION AND TECHNOLOGY
16. Safaricom Ltd Ord.0.05
AUTOMOBILES AND ACCESSORIES
17. Car and General (k) Ltd Ord.5.00
COMMERCIAL AND SERVICES
18. Nation Media Group Ord.2.50
19. Longhorn Kenya Ltd
20. Scan group Ltd Ord.1.00
Source: Research 2015, NSE
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