Effect of Monetary Facets on Dynamic Capital Structure of Selected Commercial Banks Listed at the Nairobi Securities Exchange, Kenya

Abstract

Dynamic capital structure is the way firms make adjustments towards the target capital structure which is proxied by debt equity ratio. There has been variation of debt equity ratio of firms at the Nairobi Security Exchange (NSE) in an effort to achieving targeted leverage that would yield targeted revenues and profits for firms. Despite this, most firms still operate at sub optimal level and experience losses. Studies in this respect have attributed the sub optimal operations to monetary facets such as inflation rate, exchange rate and interest rate. However, the studies have yielded mixed results leaving the effect of monetary facets on the dynamic capital structure unresolved. It is on this basis the study sought to establish effect of the monetary facets on dynamic capital structure of selected commercial banks listed at the NSE. The study was anchored on market timing theory and guided by correlational research design. The target population was eight tier one banks at the NSE. Secondary data spanning ten years from 2010 to 2019 were obtained from commercial banks audited financial statements while data on monetary facets was obtained from Central Bank of Kenya database and audited financial statements of the banks. Panel data methodology was adopted to estimate Random and Fixed Effect Models and the Hausman test used to select the appropriate model. Whereas exchange rate had insignificant positive effect, interest rate had significant positive effect on the dynamic capital structure.  Inflation however, had significant negative effect on the same. Therefore, to enhance performance of banks, hedging interest rate and inflation rate risks is necessary.