Effect of Capital Mix on Susceptibility to Bankruptcy of Companies Listed in the Nairobi Security Exchange

Abstract

This study sought to examine the effect of capital mix of companies listed in Nairobi Stock Exchange and their susceptibility to bankruptcy. The objectives guiding the study included cost of debt, cost of equity, debt-equity and return on equity on listed companies susceptibility to bankruptcy. Literature review included the theoretical framework guiding through the theories that supported the study variables namely financial theory of investment, option theory, Trade-off Theory, pecking order Theory and the Altman Model, the conceptual framework followed by the empirical studies that existed. The study used descriptive research design to investigate the effect of independent variables on the dependent variable. The study also used stratified and simple random sampling methods where the sampling frame was the best performing companies in NSE and the least performing including those with liquidity issues where secondary data was used and analyzed using STRATA. The study found that Susceptibility to Bankruptcy of listed companies could be jointly explained by Cost of Debt, Cost of Equity, Debt-Equity Ratio and Retained Earnings. Cost of Debt had positive and significant relationship with Susceptibility to Bankruptcy whereas the study revealed positive and significant relationship between Cost of Equity and Susceptibility to Bankruptcy for listed companies. Thirdly, listed companies were mostly financed using Debt and Equity. The level of Debt-Equity had a positive and significant relationship it implied that borrowed capital was invested into investments which had positive net present value and Retained Earnings had a positive and significant relationship between Retained earnings and Susceptibility to Bankruptcy.