Effect of mergers on capital structure of a firm: a case of national industrial credit bank (k) ltd

Abstract

Mergers in Kenya banking industry have grown dramatically since 1994. Some of the reasons put forward for mergers are to meet the increased levels of share capital, market share, firm size, information asymmetry, tax regimes, and to benefit from best global practices among others. The banking industry is consolidating at an accelerating pace yet no conclusive results have emerged on the benefits of mergers. This study sought to establish the effect of mergers on capital structure, using the case of NIC Bank Ltd. The specific objective was to establish the relationship between the bank‘s capital structure and its bad loans, size, services and interbank. The study adopted an explanatory research design since it is a cause-effect relationship. It used secondary data from the Nairobi Stock Exchange (NSE). Both descriptive and inferential statistics were used to analyze the data. Regression analysis showed that firm size affected capital structure most (β2=0.940, p value = 0.002), followed by bad loans (β1=0.894, p value = 0.004) and bank services (β3=0.641, p value =0.000). Interbank affected capital structure negatively (β4= -0.511, p value=0.003). The study concludes that mergers increased positively the effect of firm size, services and bad loans on capital structure while interbank affected capital structure negatively. The study recommends firms in the banking industry to plan and evaluate mergers while focusing on effects of firm size, bad loan, income from services and net interbank on its capital structure.