The study sought to find out the effect of
heuristic biases on capital structure of firms listed at Nairobi Securities
Exchange, Kenya. The study used firm size, profitability, tangibility and
growth opportunities as control variables. Regression analysis revealed the
following: 59.8% of capital structure could be explained using heuristic bias,
firm size, profitability, and tangibility and growth opportunities. The
regression coefficient showed that heuristic biases had a negative and
significant effect on capital structure (B=-2.814, p<0.05). Firm size had
a negative and significant effect on capital structure (B=-0.413, p<0.05).
Tangibility had a positive and significant effect on capital structure
(B=3.962, p<0.05). However, growth opportunities and profitability had a
positive and insignificant effect on capital structure. The F-test depicted
that the model was significant (p<0.05) in explaining changes in capital
structure. The study concluded that capital structure of firms is affected by
irrational behavior of the managers.
Keywords: Heuristics, capital
structure, firm size, profitability, tangibility, growth opportunities.