Abstract
Based on a panel of publicly listed firms in Kenya over the period of 2008 to 2014, we examined if Chief Executive Officer’s Characteristics affects capital structure. CEO tenure, CEO gender and CEO age and CEO education were used as independent variables while the capital structure was used as the dependent variable of the study. The study used upper echelon theory, trade-off theory and agency theory. Majorly, descriptive statistics, Pearson correlation analysis and panel regressions were performed. Panel regression analysis was used to determine the effect of CEO characteristics on capital structure. CEO tenure had a negative and significant effect on capital structure, CEO age had a positive and significant effect on the capital structure, CEO gender and CEO education indicated a negative and significant effect on capital structure respectively. The study indicates that there is an association between CEO characteristics and capital structure of listed firms in Kenya. It is therefore instrumental for firms to appoint their CEOs based on the duration they have served the company, CEOs to sit in their position for a longer period of time and those who have the requisite knowledge and experience hence they can be tasked with making important decisions pertaining firms' financing. Keywords: capital structure, CEO characteristics, Upper Echelon Theory, Trade-Off Theory, panel data and Agency Theory DOI: 10.7176/RJFA/11-18-07 Publication date: September 30 th 2020
Highlights
The capital structure framework has been studied for a long time with no satisfactory theoretical model or significant empirical tests (Harris and Raviv 1991, Frank and Goyal 2008 Bae, et al, 2011)
CEO tenure showed a mean of 6.76 and standard deviations of 3.27 suggesting that majority CEOs in NSE firms hold an average of 5 years or most contracts of employment ends at the fifty year
On CEO tenure, the study has established that CEO tenure has a negative effect on the capital structure
Summary
The capital structure framework has been studied for a long time with no satisfactory theoretical model or significant empirical tests (Harris and Raviv 1991, Frank and Goyal 2008 Bae, et al, 2011). A theoretical explanation is still lacking and empirical results are not yet sufficiently consistent to resolve the capital structure issues on how firms choose between the different methods of financing. Modigliani-Miller (MM) propagated that the choice between debt and equity financing has no material effect on the firm value and management should not be concerned about the proportion of debt and equity that constitute the capital structure of the firm. Modigliani and Miller (1963) added the effect of corporate taxes to the capital structure framework Modigliani and Miller (1958) and found that firm value is maximized when the firm is financed entirely with debt which is impracticable because some ownership equity must exist in a firm. Debt and taxes (Miller, 1977), bankruptcy costs (Stiglitz, 1972; Titman, 1984), agency costs (Jensen and Meckling, 1976; Myers, 1977), information asymmetries (Myers and Majluf, 1984; Myers, 1984), firm level determinants, (Rajan and Zingales , 1995), industry-level determinants ( Lööf, 2004; Titman and Wessels, 1988) showed contradicting point of view in describing the impact of particular factor on capital structure
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