EFFECT OF CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF FIRMS LISTED ON THE NAIROBI SECURITIES EXCHANGE

Authors: Mwangangi Ruth, Kinyua Helen Wairimu & Wanyoike Charles Githira

ABSTRACT

One of the issues that companies confront is determining the ideal financing mix that would increase a company’s value and, therefore, the wealth of its shareholders. The main objective of the study was to determine the effect of capital structure on the financial performance of firms listed at the Nairobi Securities Exchange. The study variables were long-term debt to total assets, total debt to total assets, debt to equity ratio, and current ratio as well as one intervening variable, the firm’s age. The research was anchored on three theories; agency theory, pecking order theory and the trade-off theory with a correlation analysis research design being adopted. The population of the study were the 62 companies listed on the NSE as of the 30th of June in 2022. The study employed secondary data collection methods, while the collected data was analyzed using both descriptive and panel regression.  The study found that there is a small variation (sta. Dev. =0.0976) in return on assets among the firms under study from 2017-2021. The majority of the firms had a ratio of 0.0195 for return on assets implying that out of the net income generated, it is 1.95% of the total assets. Similarly, the study found that debt to equity ratio had the highest deviation (9.593) with a maximum ratio of 60.277 and a minimum of -70.383.  In regard to the current ratio, explaining the liquidity of firms, the study established that some of the firms performs very well since their liquidity capacity was more than 65%. Based on inferential statistics, the study established that long-term debt to total assets has a negative (B=-0.022) and insignificant effect (a=0.513) on the financial performance of firms listed at the NSE. Consequently, profitability is reduced hence slow financial performance. Additionally, the study established a negative and significant relationship between the total debt to total assets ratio and the financial performance of the firms under study. The implication drawn is a result of poor debt terms in regard to the cost of debt thus resulting in poor financial performance. However, the study found that the current ratio positively (B=0.001) influences the financial performance of the firms under study. The study found that as the liquidity status of a firm is at an appropriate state, the firm is capable of handling short-term obligations such as payment of suppliers hence ensuring a constant supply of raw material which enhances production, sales and profitability. Generally, the study established that capital structure explains 12.2% of financial performance. Incorporating the age of the firm as an intervening variable enhances the contribution of capital structure towards financial performance to 12.4%, this implies that as the firm operates for more years, it adopts an appropriate capital structure that enhances financial performance.

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