FINANCIAL CONSTRAINTS, CAPITAL STRUCTURE AND INVESTMENT: EVIDENCE FROM LISTED MANUFACTURING FIRMS IN KENYA
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Date
2018-11
Authors
Kirui, Benard Kipyegon
Journal Title
Journal ISSN
Volume Title
Publisher
University Of Nairobi
Abstract
Evidence of financial constraints and its effects on a firm’s real decision in
countries with advanced capital markets implies that the situation might be
severe in countries with less developed capital markets. Despite this possibility,
there is a dearth of evidence on the severity of financial constraints and its effects
in Kenya. Against this backdrop, this study examined the firm capital structure
and investment and analysed the role of financial constraints in this context in
Kenya. To this end, three specific objectives were addressed, each by an essay,
using data from all manufacturing firms that were listed on Nairobi Securities
Exchange between 1999 and 2016. The data was collected from published
annual financial statements that companies filed at the Capital Market Authority. The
first essay analysed the determinants of financial constraints in Kenya. Size-age
the measure was found to perform better than measures of financial constraints based
on endogenous switching regression and has high correlation with experienced
financial constraints. Thus, the size and age of the firms are the main determinants
of financial constraints in Kenya. The endogenous switching regression based
classifications were found to be sensitive to the choice of the starting values,
and the specification of the outcome equation and the selection equation. They
were inefficient and produced inconsistent sub-samples. About 67 per cent of the
firm-years in the manufacturing sector suffers from financial constraints. The
second essay investigated the effects of financial constraints on firm capital
structure. The goal of this essay was implemented in two ways. First, a financial
constraints dummy variable has interacted with the determinants of capital
structure. Second, an incremental F test was used to test for the differences in the
financing behaviour across financial constraint regimes. Pecking order theory
does not hold, however, financing behaviour varies across financial constraint
regimes. The third essay investigated the effects of financial constraints on firm
investment. The study used investment Euler equation and Tobin Q to examine
whether constrained and unconstrained firms invested differently, in terms of
what drives investment. Secondly, real exchange rate shock was used to analyse
firm’s investment response to shock in the presence of financial constraints. The
empirical strategy was to compare investment rate immediately before and after
the shock for firms under different degrees of financial constraints. Financial
constraints negatively affect investment and firm’s response to shock depends
on financial constraint status. Overall, financial constraints affect young and
small firms causing them/the firms to forego external capital, underinvest, and
alter their response to a positive shock. Policy should aim at easing constraints
on access to capital by broadening the scope of assets that can be pledged as
collateral and instituting policies to reduce costs associated with verification of
private information, and contract enforcement including legal charge such as by the creation of a central depository for collateral. Furthermore, to minimize policy
related distortions, financial constraints should be taken into consideration in
designing the level of interventions.
Description
HG 4501 .K57 2018
Keywords
Financial constrains , Manufacturing , Investment , Capital structure , Endogenerous switching