Capital structure
The Capital structure refers to the optimal mixture of equity and debt companies employ in financing their operation. The choice of capital structure is affected by both the industry-specific determinants and the country-specific factors. Equity can be common stock or preferred stock while debt usually comprises of short term and long term. One of the critical macroeconomic variables that affect the capital structure is the National domestic product. Companies in Countries with higher growth of GDP
prefer long term debt to equity in financing. The reason is, growing GDP indicates a countries economy is performing well and it will maintain that trend in the foreseeable future. Consequently, companies usually project their growth will follow in that direction.AS such, long term debt financing becomes the best option for them. Second, The cost of equity and debt differs between countries; for instance,
it is easier for countries in developed economies to access cheaper debts in developing countries. Consequently, firms in developed countries usually have more debts than equity in their capital structure. For instance, the cost of capital in Kenya is higher compared to Australia as measured interest rates. As a result, a lot of companies in Kenya are equity financed.