The Effects of Capital Structure on Company Valuation,A Case Study of Comapanies Quoted on the Nairobi Stock Exchange

Abstract

The irrelevance theory of capital structure was first proposed in 1958. Managers of companies oflen face t:he challenge of making financial decisions such as whether to borrow or not, how much to borrow, when to borrow and from who. Once borrowed, debt must be redeemed at some future time. Equity is permanent in that issued shares are not easily cancelled. Shares of companies with a high proportion of debt may be considered a high credit risk by would-be lenders and investors would generally wish to pay less for such shares. The problem addressed in this study was the impact of change in capital structure on change in company value as measured by market capitalization of companies quoted in the Industrial and Allied Sector on the Nairobi Stock Exchange. The objectives were to find out whether the company capital structures are similar, whether Capital Structures are consistent over time and to find the relationship between capital structure and company valuation. Secondary data was collected from the Nairobi Stock Exchange library and analyzed to test the earlier set hypotheses. Results of this study indicated that that there are significant differences in the capital structures of companies in the Industrial and Allied Sector, the Capital Structures vary over time and that Capital Structure is irrelevant in determining the company valuation. The significance of the study is that it will help interested investors, owners and scholars in predicting the likely implications of capital structure decisions in companies.