International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss

Equity Structure Effect on Financial Soundness of Non-Financial Companies Listed in Kenya
Dr. Robert Gitau Muigai

Since independence, Kenya has experienced numerous instances of corporate failure among public listed companies. In addition, cases of operating but financially struggling corporations have been witnessed. This has not only eroded investors’ confidence in the capital market but has also culminated in loss of shareholders’ wealth. Subsequent investigation reports by government agencies have attributed this undesirable phenomenon to the tendency by listed corporations to employ aggressive financing strategy resulting to over-gearing. Empirical studies have however shown that use of borrowed capital is not singularly detrimental to firms. Considering the dichotomous modes of corporate financing (debt and equity), there is need to investigate how equity financing influences corporate financial soundness. This study therefore sought to shed light on the effect of equity structure on financial soundness of non-financial companies listed in Kenya. The study employed panel research design. A census of the 40 non-financial companies listed as at 31st December 2013 was taken. The study used secondary data extracted from the published financial statements of listed non-financial companies over the 10 year period from 2004 to 2013. The study estimated the specified panel regression model for random effects as supported by the Hausman test results. Feasible Generalized Least Square (FGLS) regression results revealed that employment of internal equity has a positive and significant effect on financial soundness of non-financial firms while external equity is negatively and significantly related to financial soundness of listed non-financial firms. On the basis of these empirical revelations, the study recommended that managers of listed non-financial companies should embrace use of internal equity in financing their firms and employ external equity sparingly in an effort to promote the level of financial soundness.

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