EFFECT OF VOLATILITY OF BANK EARNINGS ON CAPITAL STRUCTURE CHOICE FOR COMMERCIAL BANKS OPERATING IN KENYA
Abstract
The purpose of the study was to examine the effects of volatility of bank earnings on capital structure choice for commercial banks operating in Kenya. A correlational research design was used to measure the relationship between volatility of bank earnings and the capital structure choice. The study used secondary data over the period 2004-2013 from 39 commercial banks’ annual financial reports filed with the Central Bank of Kenya. The data was analysed using Statistical Package for Social Sciences (SPSS) using multiple linear regression models to test the relationship between volatility of bank earnings and the capital structure choice (debt-equity ratio). The study found that volatility of earnings had significant effect on the capital structure choice and exhibited a negative and linear correlation with capital structure choice. The study concluded that Earnings volatility is costly as it affects a firm's investment policy by raising external capital. Firms with smoother earnings should be more highly valued and hence attract funding competitively. The study recommended that in order to mitigate volatility in earnings, the banks need to ring fence their customers from competitors like Fintechs, Saccos, MFIs, peer banks and those who are encroaching their business territories. Cross selling and upselling using technology platforms like customer relationship management (CRM) will further enable the banks increase their customers’ wallet size, increase product uptake as well as sell new and substitute products.
Key Words: Volatility of Bank Earnings, Capital Structure
CITATION: Kimoro, J. N., Muturi, W., & Gekara, M. (2019). Effect of volatility of bank earnings on capital structure choice for commercial banks operating in Kenya. The Strategic Journal of Business & Change Management, 6 (2), 311 – 322.
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DOI: http://dx.doi.org/10.61426/sjbcm.v6i2.1114
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