THE RELATIONSHIP BETWEEN OWNERSHIP STRUCTURE AND LEVERAGE OF FIRMS LISTED IN THE NAIROBI SECURITIES EXCHANGE

ABSTRACT 
This study examined the relationship between ownership structure and leverage of firms listed in the Nairobi Securities Exchange (NSE). The objectives of the study were: to evaluate the relationship between state ownership and leverage, to determine the relationship between private ownership and leverage, to determine the relationship between foreign ownership and leverage and to evaluate the relationship between institutional ownership and leverage. The study adopted a correlational research design. The target population of the study comprised of all the 61 firms which have been listed in the NSE as at December 2014. The study adopted purposive sampling technique which was conducted among the 44 firms that have been consistently listed for a period of 9 years from 2006 to 2014. Data for this study was collected from annual published financial statements. Both descriptive and inferential analysis was conducted where Correlation and regression analysis was applied to test the relationship between ownership structure and leverage. Regression was conducted to test the effect of the various independent variables pooled together on the dependent variable. Two tail t-test and ANOVA test was used to determine the degree of significance of the relationship. The data analyzed was presented in form of tables. The results of the study showed that there is no statistical significant relationship between private ownership and debt ratio, debt to equity ratio and debt to total assets ratio where P=0.414, P=0.407 and P=0.405 respectively. Additionally, there was no statistical significant relationship between foreign ownership and debt ratio, debt to equity ratio and debt to total assets ratio where P=0.203, P=0.279 and P=0.280 respectively. The findings of the study revealed that there was no statistical significant relationship between institutional ownership and debt ratio, debt to equity ratio and debt to total assets ratio where P=0.478, P=0.443 and P=0.449 respectively. Finally the findings of the study revealed that there is a weak positive relationship between ownership structure and leverage (R=0.475) with a significance value of 0.807. Therefore this study concludes that there is no statistical significant relationship between ownership structure and leverage of firms listed in the Nairobi Securities Exchange.

CHAPTER ONE 
INTRODUCTION 
Background of the study 
Ownership structure and leverage are two important factors in any given organization. This is because they influence all important decisions made regarding the organization. This view considers ownership structure as the shareholder structure which refers to equity ratio occupied by various shareholders (Wu, 2003). Publicly owned firms have legal separation between management and ownership. The owners might be having the funds required but they lack the managerial skills to manage the organization efficiently and effectively. On the other hand, they might be having business ideas but do not have sufficient funds to enable them implement the ideas. For this reason they seek internal and external borrowing. This brings in the relationship between debt holders and shareholders and thus the agency conflict between the two parties (Damodaran, 1997). 

Isshaq and Otchere (2011) noted that both the principal and the shareholders are utility maximizers. Therefore, shareholders are forced to incur some monitoring costs in order to reduce the amount of divergence of interest by the managers. According to Slama and Taktak (2014), ownership structure can improve the performance of firms by decreasing monitoring costs and providing better control over the management. This is because the risk taking incentives by management can be reduced by the nature of ownership in a firm. Additionally, ownership structure may prevent the managers from undertaking sub-optimal projects and increasing their earnings leading to a reduction in shareholders wealth (Lappalainen and Niskanen, 2012). Firms that are owned by a block of shareholders may be able to reduce the willingness of the management to engage in strategic changes and this can lead to a risk aversion. 

Al-Najjar and Taylor (2006) stated that ownership structure plays a key role in monitoring and directing firms. Large shareholders can be able to elect the board of directors which can in turn act as an agent in overseeing the performance of the managers. Slama and Taktak (2014) noted that firms that are owned by large shareholders can be able to obtain private information from the managers and transfer the information to other shareholders. This acts as a means of reducing asymmetry of information between the shareholders and the managers thereby enabling the owners to obtain more information about the performance of their firms. 

Reddy and Locke (2014) affirm that ownership structure can assist in reducing information asymmetry by discouraging managers from exploiting shareholders resources. Furthermore, the ability of large shareholders to collect information has a significant effect on the financial decisions made by the firms. 

According to Din et al (2013), firms that have a diverse degree of ownership concentration among different groups can be able to impact on the opportunism behavior and financial decisions by the managers. Large shareholders can be able to align their interests more effectively to those of the managers (Ganguli, 2013). As a result, the large shareholders can be relied upon to reduce the agency conflict. However, Yang et al (2014) notes that large shareholders may act to achieve their interests at the expense of other shareholders. Controlling shareholders are able to make most of the decisions thereby suppressing the minority shareholders. Therefore, ownership structure may not be adequately effective in reducing the agency conflict. Yerram (2013) argues that ownership structure is likely to influence agency conflict at a certain level of stock holding. For that reason, the use of debt becomes paramount in reducing the conflict between shareholders and management. 

Financial leverage affects firm value by influencing agency costs (Lee and Lee, 2014). Debt financing limits the amount of free cash available to managers and this act’s as a means of controlling the agency problem. According to Ganguli (2013), shareholders prefer debt financing so as to maintain their voting rights to control and monitor their firms. Additionally, debt acts as a disciplining mechanism which lenders utilize in order to monitor the actions of the managers. Yarram (2013) noted that the use of debt enables shareholders to transfer the responsibility of monitoring the actions of the managers to the lenders. Managers of firms financed by debt are forced to reduce wasteful expenditure and enhance operating efficiency so as to meet the debt covenants. Nonetheless, the use of debt can induce managers to forego projects with positive net present values (Din et al, 2013). 

Leverage is highly associated with bankruptcy risk. Additionally, lenders impose a lot of restrictions on firms that take up leverage. This helps reduce the probability of default or bankruptcy. This also helps in reducing the agency conflict between the two parties. Companies with high debt ratio tend to disclose more detailed information to assure investors and lenders than those with low risk levels (Naser et al, 2006). A different view shows that as the debt of the company increases, they prefer not to disclose much information because debt holders do not require information as shareholders and again the information may make debt holders to lose confidence in the organization. The debt holders might start seeing the possibility of firms not being able to settle their debts (Rahman, 2002). Therefore, firms are supposed to gravitate structures that yield the best results through making the best decisions. This is generally because firms that have the best ownership structure tend to operate efficiently and effectively. 

Ownership structure and leverage are two important aspects in the governance of firms. According to Lee and Lee (2014), debt financing enables owners to take actions to maximize their wealth. Financial leverage affects agency costs thereby influencing the value of a firm. Huang et al (2013) noted that shareholders have a tendency of raising more debt so as to reduce the agency costs. Consequently, ownership structure may play an important role in determining the capital structure of a firm. Al-Najjar and Taylor (2008) argue that ownership structure has a significant impact on the financial decisions of a firm. Thus, owners may opt for increased levels of debt in an aim to improve the performance of their firms.

For more Business Administration Projects Click here
===================================================================
Item Type: Kenyan Postgraduate Material  |  Attribute: 63 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
===================================================================

Share:

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Search for your topic here

See full list of Project Topics under your Department Here!

Featured Post

HOW TO WRITE A RESEARCH HYPOTHESIS

A hypothesis is a description of a pattern in nature or an explanation about some real-world phenomenon that can be tested through observ...

Popular Posts