Effect of Diversification Strategy on the Capital Structure of Listed Commercial and Services Firms at the Nairobi Securities Exchange

Abstract

Funding with debt or equity is considered when a firm is seeking a diversification strategy. However, capital structure decisions are a puzzle in finance. The purpose of this study was to examine the effect of diversification strategy on the capital structure of listed commercial and services firms at the Nairobi Securities Exchange (NSE). The study sought to achieve the following objectives: to determine the extent to which listed commercial and services firms at the NSE have implemented diversification strategy, establish the level of debt in relation to equity in the capital structure of listed commercial and services firms at the NSE, and examine the effect of diversification strategy on the capital structure of listed commercial and services firms at the NSE. The study was anchored on coinsurance effect, transaction cost, pecking order, and resource-based view (RBV) theories. This study used a longitudinal descriptive research design. A census study was conducted on the 11 commercial and services firms listed on the NSE. Secondary data was collected for the period 2011 to 2020 and analyzed through descriptive and inferential statistics using EVIEWS 11. To validate the results, regression diagnostic tests were carried out. A robust regression analysis was then conducted to remedy heteroscedasticity violation. The results showed that concentric and conglomerate diversification strategies had a weak negative and significant effect on capital structure, that is, (β=-0.3667, p=0.0010), (r=-0.1458), and (β= 0.9210, p=0.0001), (r= 0.1309), respectively, whereas geographical diversification had a weak negative and significant effect, that is, (β=-0.3064, p=0.0019) and (r=-0.0852). From these findings, the study recommends that managers of commercial and services firms invest in research and development and come up with relevant diversification strategies that match their capital structure needs.