Effect of chief executive officer characteristics on capital structure of publicly listed firms in Nairobi securities exchange, Kenya

Abstract

The firm's capital structure decisions are highly important to the organizations because it has a direct impact on firm value and stockholder's wealth with extant literature indicating that CEO characteristics are critical in determining firm’s financial decision making. The theoretical framework suggests that firms select capital structures depending on various aspects which determine the costs and benefits associated with debt and equity financing. However, in many instances, corporate leveraging decisions are closely related to certain observable managerial traits in that the CEO effects can be deduced from leverage decisions. However, its empirical work has lagged behind in the bank-based financial systems in the Sub – Saharan Region. Therefore, this study sought to determine the effect of CEO characteristics on the capital structure of publicly listed firms in Kenya covering the period 2008 - 2014. CEO duality, CEO tenure, CEO gender, CEO age and CEO education were used as independent variables while the capital structure was used as the dependent variable of the study. The study used upper echelon theory, trade-off theory and agency theory. Majorly, descriptive statistics, Pearson correlation analysis and panel regressions were performed. Panel regression analysis was used to determine the effect of CEO characteristics on capital structure. The study found CEO duality had no significant effect on capital structure(β1 = 6.758 t = 0.451, p> 0.05), CEO tenure had a negative and significant effect on capital structure (β2= -1.50 t = -4.89, p< 0.05), CEO age (β3 =0.6018, p<0.05) had a positive and significant effect on the capital structure while CEO tenure (β4 =-1.5033, p<0.05) and CEO education (β5= -7.00, p<0.05) had a negative and significant effect on capital structure. CEO gender indicated a negative and significant effect on capital structure (β6 =-8.8570, p>0.05). The study indicates that there is an association between CEO characteristics and capital structure of listed firms in Kenya. It is therefore instrumental for firms to appoint their CEOs based on the duration they have served the company, CEOs to sit in their position for a longer period of time and those who have the requisite knowledge and experience hence they can be tasked with making important decisions pertaining firms' financing. The study would be of great importance to investors, shareholders, managers and policymakers in making knowledgeable decisions and regulations considering the financing patterns and strategies of financial markets in Kenya. Therefore, getting CEOs’ characteristics right is vital for the well-being of an organization.