Stakeholder power, CEO dominance, Debt Tax shield and Capital structure among firms listed in Nairobi securities exchange, Kenya

Abstract

Companies' management faces challenges in determining the best means to raise cash while also meeting various stakeholder interests, such as whether to issue stocks or bonds. The capital structure of a company is made up of these sources of funding. Despite substantial research on the subject, little attention has been paid to the likely interaction of the debt tax shield and CEO dominance on the link between stakeholder power and capital structure. In trying to solve this problem, the study sought to establish the effect of stakeholder power on capital structure mediated and moderated by CEO dominance and debt tax shield respectively. The specific objectives were to determine: the effect of government power, investor power, and creditor power on capital structure and to establish the mediating and moderating effect of CEO dominance and debt tax shield respectively on each of the relationships. The study was guided by the capital structure theories namely; pecking order theory, stakeholder theory, agency theory and static trade-off theory. Positivism research philosophy was used. A panel data and explanatory research design were used to conduct a survey of all the firms listed at Nairobi securities exchange. The total number of registered firms at NSE were 67 which made up the study population. The study focused on 40 firms that met the inclusion exclusion criterion over the period 2008-2020. This gave a total of 520 firm year observations. The study analyzed data obtained from secondary sources using a data analysis schedule. Hausman’s test was carried out and the test results showed that, fixed effects model was fit for the study regression analysis. The data was analyzed using both descriptive and inferential statistics. Descriptive statistics showed that firms prefer debt than equity in financing projects. The regression results showed that stakeholder power had a significant effect on capital structure; firm size (β= 0.02, p<0.05), firm age (β= -0.0008, p<0.05), growth opportunities (β= -0.015, p<0.05), government power (β= 0.245, p<0.05), creditor power (β= 0.352, p<0.05), investor power (β= 0.0613, p<0.05), CEO dominance (β= 0.00003, p<0.05), debt tax shield (β= -0.00016, p<0.05) and the mediating effects showed that CEO dominance mediated the relationship between government power and capital structure (β= 0.1533, p<0.05), creditor power and capital structure (β= 0.05, p<0.05) but could not mediate the relationship between investor power (β= 0.00782, p>0.05) and capital structure. The moderating effect of debt tax shield showed that debt tax shield significantly moderated the relationship between government power (β= 0.0058, p<0.05), creditor power (β= -0.0005, p<0.05), investor power (β= -0.0004, p<0.05) and capital structure but could not moderate the relationship between CEO dominance and capital structure (β= -0.000006, p>0.05). Index of moderated mediation supported the moderation effect of debt tax shield on the indirect relationship between creditor power (β= 0.0117, 95% CI= 0.0055; 0.0211) and investor power (β= 0.0076, 95% CI= 0.0039; 0.0133) but failed to support government power (β= -0.0164, 95% CI= -0.0982; 0.0076) and capital structure. The study concluded that firm size, government power, creditor power, investor power and CEO dominance had a positive and significant effect on capital structure and that, increase in these variables significantly increased debt ratio. On the other hand firm age, growth opportunities and debt tax shield had a negative and significant relationship on capital structure. Meaning an increase in these variables significantly reduced debt ratio. The mediating and moderating effects explained and enhanced the relationship between the various stakeholder power variables and capital structure. The study findings were in line with the pecking order theory argument that firms use internal sources and incase of deficits they go for debt and equity as the last resort. The study provided a number of recommendations, including that management create a model that accounts for the interests of the many study stakeholders, company BODs make sure that CEO dominance is monitored in relation to borrowing, and capital market authority eliminate obstacles that may hinder firms from borrowing