Ownership Concentration, Capital Structure and Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Ownership concentration enables majority shareholders to influence the capital structure; a key financing decision that is independently linked to firm performance. Ideally, firm managers should strive to maximize stock returns by selecting an appropriate optimal capital composition that maximizes the trade-off between the cost of leverage and gains. However, the performance benefits are not always realized because the controlling shareholders may adversely affect stock returns by extracting private benefits at the expense of the minority shareholders, leading potential investors to consider the firm as a risky and unattractive investment, hence lowering stock demand and price. This research sought to determine the intervening effect of capital structure on the ownership concentration and stock returns relationship. A census survey was done on sixty-seven firms listed at NSE from 2006 to 2019 and data was obtained from sixty firms that had been listed for at least two years. A fixed effects model was then utilized to conduct data analysis. The four-step mediation process showed that capital structure mediated the connection between ownership concentration and stock returns. The results contribute to the empirical literature by reducing the conflicting positions on the link between ownership concentration and stock returns by introducing capital structure into the relationship and confirming the role of capital structure in performance management. The study recommends that agents be given incentives through monitoring and regulation to ensure that management interests and those of their principals are aligned when important financing decisions are being made to serve the interests of both majority and minority shareholder. This will promote and enhance corporate performance and increase stock returns.