Capital structure, firm value and managerial ownership: Evidence from East African countries

Abstract

East African firms are experiencing economic growth and are attracting foreign investment in the form of equity capital and loans. However, there are concerns about whether the structure of the capital and managerial ownership of these firms can influence their growth. The study examined the relationship between capital structure and firm value in East African countries and how managerial ownership influences this relationship. Sixty-five (65) listed firms in East Africa were selected for the study. The study employed a GMM estimation technique. The evidence showed that leverage has a significantly negative impact on the value of firms in East Africa, suggesting that higher debt would result in a decrease of firm value. The implication of this result is that firms can increase their value by reducing their leverage level. Moreover, the study found that managerial ownership had an inverse and significant impact on the relationship between leverage and firm value. The conclusion is that leverage decreases the value of firms in East Africa. Another conclusion is that owner-managers can use debt capital more effectively to increase firm value than non-owner managers. The implication of this result is that firms managed by owners can borrow more for their operations because it would increase the value of the firms. This study is the first to examine how managerial ownership moderates the relationship between capital structure and the value of firms in East Africa, which has a unique political, social, cultural and economic environment.