RELATIONSHIP BETWEEN DETERMINANTS OF CAPITAL STRUCTURE AND STOCK RETURNS OF NON-FINANCIAL FIRMS LISTED IN THE NAIROBI SECURITIES EXCHANGE
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Abstract
This paper established the relationship between determinants of capital structure and stock returns of non-financial firms listed on the Nairobi Stock Exchange. Specifically, the study determined the relationship between stock return and firm’s profitability, liquidity, asset tangibility of non-financial firms listed in the NSE. Secondary data used in the study was obtained from audited published financial statements for ten years for 45 non-financial listed firms in Kenya. Panel data of thirty-five firms from NSE between the years 2011 to 2020 was used to conduct the research. Ten non-financial firms did not have complete records as they were either not listed at stock market as at year 2011 (NSE, Umeme ltd, Home Boyz Ltd) or they were delisted and not trading at the stock market by year 2020 (Uchumi Supermarket ltd, Mumias Sugar, Deacons ltd). The data series were established to be highly stochastic and skewed hence the need to transform the series to logs in order to establish normal distributions and ensure Gauss normality assumptions would apply. A panel multiple regression model was adopted in order to test the influence of the four variables on stock returns. Profitability, Liquidity, firm size and tangibility were established to influence stock returns to the tune of 68.26% while 31.74% of changes on stock returns was determined by other factors not included in the analysis. This may be attributed to the firm’s internal factors and external factors beyond the control of the firm, for example the macroeconomic factors, social and political factors and legal environment in which a firm operates on. The coefficients of the variables were assumed to be the same across the firms. Low p-values for profitability, liquidity and firm size revealed that the three factors are significant in influencing stock returns across the firms at 95% level of significance. Tangibility exhibited p-value of 0.908 which is higher than 0.05, hence not significant in influencing stock return despite the positive relationship. This implies that firms need to focus more on profit, their ability to convert their fixed assets to liquid assets (liquidity) and the size of the firm in order to have a significant impact on stock returns.
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