Firm Characteristics and Capital Structure of Small and Medium Enterprises in Kenya

Abstract

Small and Medium Enterprises play an important role towards economic growth and development in Kenya at large. However, there is limited evidence on their capital structure or how they take financing decisions in Kenya. It was therefore imperative to understand how key firm characteristics affect capital structure of these enterprises to help in improving policy decisions and offering practical guidance. This study investigated firm characteristics which influence capital structure of SMEs focusing on Kenya with the hope that findings and recommendations will be replicated in in other countries. Ordinary Least Square model was applied on Kenya’s latest enterprise survey data of 2018.Both descriptive and regression analyses were employed. Results indicate that firm size and firm age are negatively associated with the capital structure. On the other hand, the study found that firm performance and assets base, affected capital structure positively. The study concludes that SMEs should find alternative funding avenues rather than relying on borrowing. A further study was also recommended to analyse why firm performance was positively related to capital structure.