The Determinants of Capital Structure in a Regulatory Industry : The Case of Kenyan Banks

This paper shows the standard cross-sectional determinants of banks' leverage in Kenya using annual financial statements from 2001 to 2009. Applying a fixed effect model, the authors find a remarkable consistency in sign, significance and economic magnitude. Like non-financial firms, banks appear to have stable capital structures at levels that are specific to each individual bank. The results suggest that large banks tend to be highly leveraged and the more profitable the bank is, the less debt it has. There has been inconclusive debate over the significance of regulatory capital and the extent counter-cyclical factors influence financial stability in banks. Our result also shows that regulatory capital is significant in determining leverage level; that is, the more regulatory capital, the less leveraged the bank is. The authors also found that growth in gross domestic product (GDP) offers a significant positive influence on the leverage level