Capital Structure and Financial Performance of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

Background: Globally, the choice of an optimal capital structure has posed a great challenge to most firms. In Kenya, some firms have achieved optimum levels while others are still faced with serious capital structure issues. Theoretically, there is a general inclination that capital structure employed automatically affects financial performance. It is against this background, that the purpose of the study was to establish the effect of capital structure on financial performance of non-financial firms listed at the Nairobi Securities Exchange in Kenya. Specifically, the study sought to establish the effect of capital structure on financial performance. Theoretical literature postulates conflicting relationship between capital structure and financial performance which has underscored the usefulness of panel dataset in the study. Materials and Methods: This study employed both cross sectional and longitudinal research designs, organized as panel data. The sample population of the study consisted of thirty-three (33) non-financial listed firms. This study only used data from the 2009 to 2018 annual financial reports. The study adopted purposive sampling procedure in the determination of the sample size and secondary data from annual financial reports of the firms, African Listed Companies, Nairobi Securities Exchange publications and Capital market Authority handbooks were used. STATA statistical tool was employed in the analysis of the data. Descriptive statistics were used to analyse the main characteristics of the variables. The hypotheses were tested using regression analysis and correlation analysis. Results: The findings of the study revealed that the effect of Debt Ratio (DR) and Debt-Equity Ratio (DER) on firms’ financial performance (ROA) was statistically significant. Further, the results of Equity Ratio showed that the effect of equity finance on financial performance was not statistically significant. Conclusions: The study not only contributed to understanding the link between capital structure and financial performance in Kenya, but at the same time confirms the findings of previous studies which revealed significant and insignificant links between capital structure and financial performance.