EFFECT OF CAPITAL STRUCTURE DECISIONS ON FIRM VALUE OF LISTED MANUFACTURING FIRMS IN MOMBASA COUNTY

Abstract

The current study sought to examine the effect of capital structure decisions on firm value of listed manufacturing firms in Mombasa County. This study adopted descriptive research design and the population of interest consisted of 282 employees of selected listed manufacturing firms in Mombasa County. The study adopted stratified sampling technique to obtain a sample size of 165 selected using Slovene’s formula. The study relied on both primary and secondary data where primary data was collected using structured questionnaires while the secondary data was gathered from the financial report of manufacturing firms in Mombasa. Data was analyzed using the Statistical Package for Social Scientists (SPSS) version 23 where descriptive and inferential analysis was conducted to show the relationship between the study variables. The study findings showed that unit increase in leverage will lead to a positive increase in firm value. Further a unit increase in equity financing will lead to a positive increase in firm value and a unit increase in liquidity will lead to a positive increase in firm value. Finally a unit increase in retained earnings will lead to an increase in firm value of listed manufacturing firms. From the research findings, the study concluded that financial leverage is vital for any profit maximizing firm. It was concluded that manufacturing firm leverage has increased over the last two years and that increasing debt will increase firm value due to the benefits obtained from the tax shield . The researcher concluded that most manufacturing firms will take angel investors as the first option and that equity financing has positive relationship to firm value as it was found to reduce costs of financial distress. The study recommended that the listed manufacturing firms must be careful on how much debt they take as this may undermine their return on assets. Management which is heedless on the costs and risks associated with financial leverage may lead to reduced profitability. Key words: Firm Leverage, Ordinary Share, Liquidity, Retained Earnings, Manufacturing Firm Value CITATION: Bilafif, S. M., & Ibrahim, A. (2019): Effect of capital structure decisions on firm value of listed manufacturing firms in Mombasa County. The Strategic Journal of Business & Change Management, 6 (2), 658 – 677.