Board Characteristics and Capital Structure Decisions of Commercial Banks in Kenya

Abstract

Organizations in the modern society are faced with numerous challenges that require those in charge with governance to make effective decisions that enhance organizations’ overall performance and sustainability. One of the key decisions an organization’s board ought to make involve capital structure. Despite various research that have been conducted relating to board characteristics and capital structure, several authors concurs that the manner in which banks select the best capital structure, and the factors that influence their corporate financing behavior are not well understood. The main aim of this study therefore was to investigate board characteristics and capital structure decisions of commercial banks in Kenya. The study measured board characteristics with respect to board size, board diversity, board independence and board expertise while the capital structure decisions was gauged with capital structure ratio, that is, total debt ratio. These dimensions also formed the specific objectives of the study. The study assessed various literatures covering both theoretical and empirical that elaborates on the study variables providing more insight as well as identified gaps that needed to be filled. The study employed correlation design as it strived to demonstrate the causative connection between study variables. All selected commercial banks formed the target population with chief finance officers and internal auditors being the target respondents in these banks. The primary source of information was both primary and secondary data of this study whereby primary data collection instrument was the questionnaire whose reliability and validity was ensured before collecting data. Collected data was properly assessed and checked before conducting final analysis. Data was analyzed using descriptive and inferential analysis, which was aided by statistical package for social science and the outputs were presented in form of graphs, pie charts, frequency tables and narrations. The findings of the study showed a strong positive correlation between all the study measures as shown by R value of 0.824. From inferential analysis findings, the study concludes that on the overall all the board of directors’ characteristics studied had a significant influence on capital structure decisions of commercial banks in Kenya. The regression coefficients p-values were 0.000, 0.000, 0.002 and 0.001 consecutively which were all less than 0.05 indicating a significant relationship between board characteristics dimensions studied and capital structure decisions; therefore, all the null hypotheses were rejected. The study also established that capital structure of commercial banks in Kenya over a period of 5 years between 2013 and 2017 averaged at 0.841 which was less than 1.00, indicating that these banks finance their assets using equity as opposed to debts. As a result, the study concluded that board characteristics have a significant impact on capital structure decisions made by Kenyan commercial banks. Furthermore, commercial banks in Kenya regard financial flexibility as more important than the tax shelter advantage, implying aversion to debt and a proclivity to follow an inverted pecking order when it comes to external funds. The study therefore recommends that banks’ board and management should manage debt and equity levels rationally to enhance their performance; banks should select the right size of board with the right mix of expertise and diversity who will be able to monitor the management but will not interfere with or infringe on capital structure decisions; banks should also increase board independence in order to benefit from the skills and expatriates of these board members; and finally a selection of banks’ board with divergent skills and qualifications so that banks can reap from the heterogeneity of educational backgrounds and competences.