Debt and Equity choice for funds in east africaAbdifitah Mohamed Jama Deer The main aim of my research is to get answer these questions What is the correlation if interest rate increase or decrease and capital structure in the company in east African firms

Debt and Equity choice for funds in east africaAbdifitah Mohamed Jama Deer
The main aim of my research is to get answer these questions
What is the correlation if interest rate increase or decrease and capital structure in the company in east African firms?
Not only East African country beyond these countries, what are the determinants of capital structure choice of fund whole the continental
If we use all theoretical framework does help to explain all variances
The purpose of Research
In this research, I will use difference theories so as to reach empirical result of debt-equity choice and my sample will be 80 east African Companies downstream (fuel stations) although the number of the companies in these countries are more than 100.

I will focus in my research how the interest rate fluctuation and equity-debt are related last ten years. The models that I will use are trade-off agency and pecking.
LITERATURE REVIEW
ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.1016/j.irfa.2006.08.003”, “ISBN” : “1057-5219”, “ISSN” : “10575219”, “abstract” : “Using a sample of over 5000 European firms, we document the driving factors of capital structure policies in Europe. Controlling for dynamic patterns and national environments, we show how these policies cannot be reduced to a simple trade-off or pecking order model. Both corporate governance and market timing impact upon capital structure. European firms limit themselves to an upper barrier to leverage, but not to a lower one. Debt constrains managers to payout cash, and equity may become cheap during windows of opportunity. Internal financing, when available, is preferred over external financing, but companies limit future excess of slack as it constitutes a potential source of conflict. u00a9 2006 Elsevier Inc. All rights reserved.”, “author” : { “dropping-particle” : “”, “family” : “Gaud”, “given” : “Philippe”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Hoesli”, “given” : “Martin”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Bender”, “given” : “Andru00e9”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “International Review of Financial Analysis”, “id” : “ITEM-1”, “issue” : “3”, “issued” : { “date-parts” : “2007” }, “page” : “201-222”, “title” : “Debt-equity choice in Europe”, “type” : “article-journal”, “volume” : “16” }, “uris” : “http://www.mendeley.com/documents/?uuid=9d4ee7d2-d1ad-4cd6-afea-498b78a0809d” } , “mendeley” : { “formattedCitation” : “(Gaud, Hoesli, & Bender, 2007)”, “plainTextFormattedCitation” : “(Gaud, Hoesli, & Bender, 2007)”, “previouslyFormattedCitation” : “(Gaud, Hoesli, & Bender, 2007)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Gaud, Hoesli, & Bender, 2007) their study and determination in related to these three factors first finding is adjustment to the target ratio about debt, second one is performance about operating and thirdly and final one is market efficiency in financing choice that are not change when the laverage book is used and they tested some of European firm Hoestli & Bender reported the main factors of CAPM policies in the EU is Debt ratio, Operating Performance and marker Performance.

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Their paper, the maturity was over 12 (years) when they examine the debt and equity choice applying case of European companies more than five hundred.

This research paper is interested because of my topic choice debt and equity in Africa Gaud, Hoestli & Bender also their research is European countries and they find when the managers of the companies prefer to issue debt so as to increase dividends of shareholder that means when the projects has profitable that is best debt disciplines of the managers.
The theory of the MM (Modigliani-Muller Theory)
Trade off Theory
The MM (1958) model is criticized, mainly because it has very unrealistic assumptions and fails when taxes, bankruptcy costs, or asymmetric information were introduced. In their later paper, MM (1963) introduced taxes to their model.

The amount of debt used is positively related with firm value this theory developed by (MM, 1963). Also we can say if manager use the theory about maximizes debt 100% choice of funds by specified as linear function of debt and equity radio also where is positive relation with firm value and debt. In this model, they assume that there is no bankruptcy cost. However, there exists an offsetting cost of debt which avoids this extreme choice. There is an increasing stress of bankruptcy with increasing usage of debt. Therefore, bankruptcy is the balancing factor for the extreme situation shown by MM in 1963
Myers (1984) changed the concept of MM (1963) and static trade off theory. By claiming the benefit of using tire off and debt and the financial distress that occurs in the likelihood of bankruptcy and increase the use of debt. According to Myers (1984), its trading outlook has been limited to the company’s limited credit rating and the establishment of the capital structure of the company.

Pecking direct hypothesis
Agency viewpoint is emerged from moral hazard and conflict of interest between principal and agent. It suggests that agents of a company have a tendency to take actions which are not best for the company because the benefits are higher than costs as such costs are shared between shareholders.

The literatures use symmetric date base on demand and suppler. If demand and suppler can get to various data (not good) the inventory are more likely to be selected. In a setup like Modigliani and Miller (1958), where efficient market hypothesis holds and all of the members of the market has a chance to reach same information under equal conditions, there would not exist any problem related with asymmetric information and all sources would be equally preferable. However, in real world, because of the asymmetric information problems, firms prefer to obtain financing from sources where there exist lowest amount of information asymmetry problems.

The main idea behind the pecking order theory which is, normally, owner of an overvalued company prefers to sell equity while owner of an undervalued company uses equity financing only as a last resort only company shareholder have to know the true about how the managers deal to maximize value of the stock in market by the company. However, an outsider can only guess these values. Therefore, people react suspiciously when shareholder tries to sell equity. Therefore, the announcement of an equity issue will decrease the value of shares of a company (Ross, 1977). On the other hand, using retained earnings or riskless debt will not cause any change in the value of the shares.

ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.1093/rfs/8.4.1185”, “ISBN” : “00221082”, “ISSN” : “0893-9454”, “PMID” : “25246403”, “abstract” : “Corporate finance researchers have long been puzzled by low corporate debt ratios given debt’s corporate tax advantage. This article recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a nongrowing stream of interest payments. Debt to value is therefore a distorted measure of corporate tax shielding. Even with very small debt-related costs, this may explain the observed magnitude and cross-sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the trade-off theory of capital structure.”, “author” : { “dropping-particle” : “”, “family” : “Berens”, “given” : “James L.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Cuny”, “given” : “Charles J.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Review of Financial Studies”, “id” : “ITEM-1”, “issue” : “4”, “issued” : { “date-parts” : “1995” }, “page” : “1185-1208”, “title” : “The Capital Structure Puzzle Revisited”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=eb3a32fd-4397-4d91-a18d-4d2cf1fd7989” } , “mendeley” : { “formattedCitation” : “(Berens & Cuny, 1995)”, “plainTextFormattedCitation” : “(Berens & Cuny, 1995)”, “previouslyFormattedCitation” : “(Berens & Cuny, 1995)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Berens ; Cuny, 1995) states that a firm follows a preference order if it prefers internal financing retained earnings to external financing and if it prefers debt to equity at external financing. ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.1093/rfs/8.4.1185”, “ISBN” : “00221082”, “ISSN” : “0893-9454”, “PMID” : “25246403”, “abstract” : “Corporate finance researchers have long been puzzled by low corporate debt ratios given debt’s corporate tax advantage. This article recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a nongrowing stream of interest payments. Debt to value is therefore a distorted measure of corporate tax shielding. Even with very small debt-related costs, this may explain the observed magnitude and cross-sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the trade-off theory of capital structure.”, “author” : { “dropping-particle” : “”, “family” : “Berens”, “given” : “James L.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Cuny”, “given” : “Charles J.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Review of Financial Studies”, “id” : “ITEM-1”, “issue” : “4”, “issued” : { “date-parts” : “1995” }, “page” : “1185-1208”, “title” : “The Capital Structure Puzzle Revisited”, “type” : “article-journal”, “volume” : “8” }, “uris” : “http://www.mendeley.com/documents/?uuid=eb3a32fd-4397-4d91-a18d-4d2cf1fd7989” } , “mendeley” : { “formattedCitation” : “(Berens & Cuny, 1995)”, “plainTextFormattedCitation” : “(Berens & Cuny, 1995)”, “previouslyFormattedCitation” : “(Berens & Cuny, 1995)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Berens ; Cuny, 1995) also indicates that if it is possible, using a riskless debt should be equally preferable as internal financing. However, if debt is available but risky, it should be placed somewhere between retained earnings and equity which actually creates the pecking order.

Capital Structure of SMEs in Several Countries
ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “ISBN” : “2373-1761”, “ISSN” : “2373-1761”, “abstract” : “Small businesses do not share the same financial management problems with large businesses. This paper shows that the source of the differences could be traced to several characteristics unique to small businesses. This uniqueness in turn creates a whole new set of financial management issues. The major implication is that, yes, there are new and interesting topics in small business financial management research.”, “author” : { “dropping-particle” : “”, “family” : “Ang”, “given” : “James S”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “James S. Journal of Small Business Finance”, “id” : “ITEM-1”, “issue” : “1”, “issued” : { “date-parts” : “1991” }, “page” : “11-13”, “title” : “Small Business Uniqueness and the Theory of Financial Management”, “type” : “article-journal”, “volume” : “1” }, “uris” : “http://www.mendeley.com/documents/?uuid=f5371d1b-62de-4dc7-a5f1-66adebb97f21” } , “mendeley” : { “formattedCitation” : “(Ang, 1991)”, “plainTextFormattedCitation” : “(Ang, 1991)”, “previouslyFormattedCitation” : “(Ang, 1991)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Ang, 1991) Indicates that theories of capital structure were not developed with thinking SMEs in first place so they may not be directly appropriate for them. However, the validity of capital structure theory for SMEs are tested empirically in many countries. In addition to size, there are two main factors
That differentiate SMEs from large firms (Bhaird and Lucey, 2010). The first one is the SME owners’ desire for keeping their independence and control. The second one is the fact that SMEs are having more severe information asymmetry problems in financing decisions. These following ways are the types of the affect capital structure decisions: In order to keep control, SME managers tend to not allow to increase debt, even for projects with positive net present values (Holmes and Kent, 1991). Also, because of information asymmetry problems, lenders are unwilling to provide finance to SMEs. For example, another literatures show that, small and young firms have shorter banking relationships, pay higher interest rates and are more likely to pledge collateral to borrow money.

ADDIN CSL_CITATION { “citationItems” : { “id” : “ITEM-1”, “itemData” : { “DOI” : “10.1111/j.0306-686X.2004.00554.x”, “ISBN” : “0306686X”, “ISSN” : “0306686X”, “PMID” : “13712943”, “abstract” : “The aim of this paper is to examine the degree to which the determinants of SMEsu2019 capital structures differ between European countries. The study is based on data for four thousand SMEs, five hundred from each of eight European countries. Regressions were run using short-term and long-term debt as dependent variables and profitability, growth, asset structure, size and age as independent variables. A key feature of this paper is the use of restricted and unrestricted regressions to isolate the country-effect from the firm-specific-effect. The results show that variations are likely to be due to country differences as well as firm-specific ones. ABSTRACT FROM AUTHOR Copyright of Journal of Business Finance & Accounting is the property of Wiley-Blackwell and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder’s express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)”, “author” : { “dropping-particle” : “”, “family” : “Hall”, “given” : “Graham C.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Hutchinson”, “given” : “Patrick J.”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” }, { “dropping-particle” : “”, “family” : “Michaelas”, “given” : “Nicos”, “non-dropping-particle” : “”, “parse-names” : false, “suffix” : “” } , “container-title” : “Journal of Business Finance and Accounting”, “id” : “ITEM-1”, “issue” : “5-6”, “issued” : { “date-parts” : “2004” }, “page” : “711-728”, “title” : “Determinants of the capital structures of European SMEs”, “type” : “article-journal”, “volume” : “31” }, “uris” : “http://www.mendeley.com/documents/?uuid=570abd8c-598d-4fb6-b025-c7011f6ce32f” } , “mendeley” : { “formattedCitation” : “(Hall, Hutchinson, ; Michaelas, 2004)”, “plainTextFormattedCitation” : “(Hall, Hutchinson, ; Michaelas, 2004)” }, “properties” : { “noteIndex” : 0 }, “schema” : “https://github.com/citation-style-language/schema/raw/master/csl-citation.json” }(Hall, Hutchinson, & Michaelas, 2004) there are several studies of the factors affecting the CAPM of the structure of SM Enterprises in more countries. Hall, Hutchinson & Michaelas says that there are differences in the factors that affecting capital structures of small and medium enterprises, around twenty four years Mr. Van der Wijst & Thurik (1993) works on financial data average of more than 20 different shops by date analysis on Germany small enterprises that operating in the retail sectors, they find that there is significant effects of the tangible assets, sales and ROI however literature are not use sales indeed. Furthermore, they observe that, non-debt tax shields, measured by depreciation expenses, have no significant influence on debt ratios. The variables that they use have an influence on maturity structure of debt rather than total debt. So, the effects on long term debt and short term debt have a tendency to cancel out. They observe that both industry characteristics and time specific effects have significant impact on capital structure of firms.

Chittenden et al. (1996) analyze a U.K. database for a sample of both listed and unlisted SMEs with an emphasis on growth and being quoted in stock market. Using OLS regression, they find that tangible assets, profitability, size and being listed have significant effects on financial structure of small firms.

They find that collaterals are used by lenders to solve information asymmetry problem widely, especially for small unlisted firms. Moreover, the importance of collateral decreases with the increase in size. Furthermore, long term debts provided to small companies are mostly based on collaterals. They conclude that financial barriers to enter stock markets for small firms needs to be reduced and innovative solutions are needed to solve agency problem between small firms and lenders.

Like Chittenden et al. (1996), Hashemi, R. (2013). also analyze a U.K. database for SMEs. Using panel data methodology, they find that size, asset structure, profitability, growth, future growth opportunities, age, stock turnover and net debtors have significant effect on short term debt and long term debt levels. They find that tax rate has an insignificant effect. Moreover, their results indicate that average short term debt ratios of SMEs increase during periods of economic recession and decrease as economic conditions improve. However, long term debt ratio is positively associated with economic growth.

Cassar, G., & Holmes, S. (2003) also examine Australian SMEs. Using OLS regression, they find that size, profitability, growth of assets and asset tangibility are important factors in determining the capital structure of SMEs. Moreover, what is different in their study is that, they examine if there is a difference between financing and firm characteristics of small firms and relatively larger firms in the sample. They divide their sample into two using sample median for total assets. They discover that, the effects of these factors on capital structure are homogenous across both small and large firm.

Sogorb-Mira, F. (2005). tests how firm characteristics affect small medium enterprises capital structure in Spain. Their data consists of 6,482 firms over the period between 1994 and 1998. Using panel data analysis, he finds that non-debt tax shields and profitability are negatively related with leverage while size, assets structure and growth options have positive effect on leverage. The results support maturity matching principle. That is, Spanish firms are trying to finance their long term assets with long term debt and their current assets with short term debt.

Degryse, H., de Goeij, P., & Kappert, P. (2012). Examine the capital structure of Dutch SMEs. They employ a panel data analysis in their investigation. Their results are in accordance with pecking order theory. That is, size, asset tangibility, growth of assets and growth opportunities are positively associated with leverage. Furthermore, they observe that SMEs prefer to use their profits to decrease their debt levels. They find that the industry that the firm operates in is also important factor for the capital structure of Dutch SMEs. They also support the maturity matching principle.

Examine the capital structures of debt maturity choices of 39 developed and developing countries including United States and Turkey. They measure the total leverage as the ratio of total debt to market value of the firm. Market value of firms is defined as the market value of common equity added by book value of preferred stock and total debt. Moreover, they use long term debt to total debt ratio as indicator of debt maturity. Turkey and USA are found among five countries which have lowest amount of total debt in their capital structures. However, when debt maturity is observed, USA is found as the fourth country which has highest long term debt ratio while Turkey is the thirty seventh. This difference stems from being a developed economy or not. Hence developed economies have more long term debt in their capital structure. In order to investigate the difference between countries, they use some country specific measure like usage of common law, level of corruption, existence of an explicit bankruptcy code, existence of deposit insurance. They provide such measures from sources including International Country Risk Guide and Corruption Perception Index. In general they find that, being a developed economy, common law and low level of corruption are associated with lower leverage and higher long term debt. Related with USA they report that, ratio of tangible assets to total assets, profitability and size is positively and market-to-book ratios of firms are negatively related with both leverage and debt maturity.

METHODOLOGY
Introduction
This study of the research design and an answer of the questionnaire which was feedback of the target population. It main feature the description of the select population, research sampling means that date sampling form population and date collection process and the method that I will use so as to get the findings and then to analysis my data that I was collected.

Research Design
In order to find the best equity and debt choice for fund In Kenyan firm last ten year period. We will use in this thesis study analytical designs and correlation about these two factors debt and equity. This paper will use to add all over view of the date and to check if any relationship between debt ratio and equity ratio of the firm that mean we have two variables or more now we mention only debt and equity ratios, as we see our research was very attractive because the feedback of our questionnaire tells us the information is relevant on the issue of interest and conclusions to enable one to mention the strong financing choice of the companies in Kenya (Cooper &Schindler, 2003).
Population of the Study
According to Mugenda and Mugenda (2003), a population is well-defined as all set of people, service, elements and events, group of things or households that are being investigated under the study. Target population in statistics is the specific population about which information is desired. The target population of interest in this study consisted of 300 listed firms in the Nairobi Securities Exchange as at December 2015.

Table 1.1 Target Population
LEVEL TARGET POPULATION THE SAMPLE SIZE PERCENTAGE OF SAMPLE POPULATION
Banking 15 8 3.2%
Insurance 20 18 7.2%
Construction & Allied 70 64 25.6%
Manufacturing & Allied 10 4 1.6%
Investment 75 70 28%
Agricultural 10 8 3.2%
Energy and Petroleum 4 3 1.2%
Telecommunication &Technology 3 3 1.2%
Automobiles and Accessories 8 3 1.2%
Commercial and Services 85 69 27.6%
TOTAL 300 250 100%
Source: Research data 2015
All items in any field of inquiry constitute a universe or a population. Complete enumeration of all items in the population is known as a” census inquiry”. The researchers undertook a sample study of 250 firms out of 300 targeted public firms as at 31st December 2015.It was presumed that in the sample inquiry, all items were covered, thus no element of chance was left and the highest accuracy was obtained. The researchers targeted financial managers/controllers depending on the organizational structure of the firm.

Sampling Design
Due to variability of characteristics among items in the population, we applied probability sample design in the sample selection process to reduce the distortion view risk of the population and made inferences about the population based on the information from the sample survey data. According to Mugenda and Mugenda (2003), a sample ratio of 0.3 was used to obtain sample representation of all respondents. In this case, twenty (20) public listed firms were subjected to the study. Only the sampled population was subjected to the data gathering exercise to provide the necessary information to the study.

Data Collection
The two sources of data collection used were primary and secondary data. Primary data used was obtained by administering questionnaires to the sampled firms through drop and pick later and in some instances the researcher discussed the contents of the questionnaire with the respondents and left them to be filled at their own time. Secondary sources were used to provide information and data from published annual reports and financing sources of firms spanning five years. In this study questionnaire and abstraction methods was used in data collection. Primary data was used to collect data directly from respondents. It consisted of questions on expertise and the attitude of top management. Abstraction method was used to collect secondary data from published reports and statements provided by sampled firms. In order to increase reliability of the findings, a combination of data from secondary and primary sources was used.

Data Analysis
Regression was performed to establish the significant differences and relationship between the independent variables (firm size, profitability, tax implications and asset structure) and the dependent variables of debt and equity, observation of the data was also applied. SPSS (statistical package for social scientist) software was used in the analysis of quantitative data. The results from the annual financial reports and other documentations were presented in form of tables, charts, graphs, and narrative statements.

The Regression Equation
=+ 1+ 2+ 3+ 4+ ?
=+ 1+ 2+ 3+ 4+ ?
Where:
= Equity of a firm
= debt of a firm
= A constant
= Profitability of a firm
= Tax effect of a firm
= Asset structure
=Firm size
?= Standard error
,,&=Are the beta coefficients
Reliability and Validity of Tests
Content validity and reliability was assured that each question in the questionnaire is valid and correctly structured for ease of understanding. Moreover, the secondary data to be reviewed had to be recent and up to date as well as containing relevant contents. To ensure reliability, the researchers had to pre-test the questionnaires using three firms. The purpose of the pilot study was to enable the researchers to improve on the reliability of the data collecting instruments and to familiarize with their organization structure /administration. Pre-testing was to provide a check on the feasibility of the proposed procedures for coding data and showing up flows and ambiguities in the instruments of data collection. It yielded suggestions for improving data collecting tools as per, Masibo (2005).

On the other hand the content validity of the two instruments of data collection was assured by ensuring that each of the items in the questionnaire addressed specific content and objectives of the study. Moreover, the instruments were given to three public firm experts who assessed the concepts which the instruments were trying to measure. The end result was that the instruments were appropriate in terms of content validity. The validity and reliability of the tools for data collection were eventually ascertained and used to collect data from the sampled respondents/firms.

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