884 Journal of Economics and Behavioral Studies Vol. 6, No. 11, pp. 884-905, November 2014 (ISSN: 2220-6140) Factors Influencing Debt Financing within State-owned Corporations in Kenya * Micah Odhiambo Nyamita, Hari Lall Garbharran, Nirmala Dorasamy Durban University of Technology, South Africa * mnyamita@yahoo.com Abstract: Debt financing is deemed crucial for economic development, as evidenced by the positive relationship between financial deepening and economic growth. Majority of studies on debt financing have been undertaken using data from developed economies, focusing more on private sector non- financial corporations. This study, therefore, attempts to fill the gap in the literature by investigating the factors influencing debt financing, using data from corporations within the public sector and from a developing economy. The study applied the fixed effects (FE), random effects (RE) and the general methods of moments (GMM), using the panel data regression analysis. Profitability, asset tangibility and corporation growth, were identified to be the main factors influencing debt financing within state-owned corporations in Kenya. Keywords: Debt financing, financial leverage, debt financing theories, debt financing factors, state-owned corporations 1. Introduction Debt financing is deemed crucial for economic development, as evidenced by the positive relationship between financial deepening and economic growth in the study of financial development and economic growth (Calderón & Liu, 2003, p. 321). The information on the extent of borrowing within the state corporations is only available to government officials and, to a small extent, to the public through the legislative assemblies. Most of the reporting systems for the public sector in developing countries are still in the process of modernisation and this makes the availability of their financial information complicated. In recognition of this fact, studies on debt financing have been done mostly using data from developed economies with more private sector corporations (Foster & Young, 2013, p. 6). This study, therefore, attempts to fill the gap in the literature by investigating the factors influencing debt financing within state-owned corporations in Kenya for the periods from 2002 to 2012. In the past decade, the financial sector has undergone much transformation in many countries around the world (Agca, De Nicolò and Detragiache, 2007:3). The technological changes and policies that reduce the administrative barriers of countries have led to increased access to foreign sources of finance. Most advanced and emerging economies have adopted banking sector reforms. The reforms have reduced or removed controls on interest rates and some state-owned banks have been privatised. In addition, policies to strengthen the bond and stock markets and their regulations have been undertaken by most countries with emerging economies, including Kenya (Ngugi, Amanja and Maana, 2006:1). These reforms have made debt financing popular among corporations, both in private and public sector. The study provides an analysis on how the debt financing patterns within the state-owned corporations in Kenya compare with the other patterns from developed economies using the available literature. Kenya’s recently developed public sector performance contracting system is supposed to improve efficiency and accountability within the state-owned corporations. The first medium-term 2008 – 2012 of vision 2030, which articulates government’s commitment to facilitating public sector growth through enhanced good governance, makes the study of debt financing within the state corporations in Kenya important. The adoption of performance standards within the state-owned corporations in Kenya, aimed at integrating and aligning their performance to vision 2030, has not yet achieved the traction required (Republic of Kenya (2013, pp. xii-xiv). Therefore, there should be clear developed and enforceable strategic plans, such as debt financing strategies, and performance plans for the state-owned corporations in Kenya. These strategic plans would facilitate alignment of corporate mandates of state-owned corporations in Kenya with national development projects, which are linked to the Kenyan vision 2030. In addition, Fosu (2013, p. 140) argued that despite several decades of research in this area, there is no commonly accepted conclusion about the factors influencing debt financing decisions within the corporations. It is believed that debt financing decisions either hurt or boost the financial performance of