Determinants of Capital Structure in the Automobile Industry: Case Study Nakuru Town

Abstract

The role of capital structure in an organization cannot be underestimated. Profitability, size of the firm, leverage and tangibility of assets has been cited in various studies as important determinants of capital structure in the Automobile Industry. These determinants however have been cited to have varying types of relationships with capital structure in different studies. This paradox makes firms in the automobile industry an interesting area for study. The purpose of this study was to examine the determinants of capital structure in the Automobile Industry in Nakuru Town. The specific objectives of the study included: establishing how profitability affects the capital structure decisions in the Automobile Industry; finding out how size of the firm affects the capital structure decisions in the Automobile Industry; determining how liquidity affects the capital structure decisions in the Automobile Industry and determining how tangibility of assets affect the capital structure decisions in the Automobile Industry in Nakuru Town. The study adopted the descriptive survey design and targeting a population of 40 automobile firms. A census technique was employed in sample determination, whereby all the 40 automobile companies were studied. The study collected primary data using a questionnaire. Prior to use of data collected, it was subjected to validity checks and reliability tests. Data collected was analyzed with the help of the Statistical Package for Social Sciences version 21.0 computer software for descriptive statistics and inferential statistics (correlations). The findings show that profitability and size of the firm has no significant effect on capital structure. However, liquidity and tangibility of assets was found to be significant determinants of capital structure in Automobile industries in Nakuru Town. The study recommends that, automobile firms in Nakuru Town should seek on measurers which will minimize the overall cost of capital by postponing seeking fresh capital issue by seeking use of internal sources and borrow from cheaper sources of debt.