Cost of Capital and Investment Decision of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

The main purpose of the study was to assess the influence of cost of capital on investment decision of non-financial firms listed at the Nairobi Securities Exchange, Kenya. The study employed the theory of Modern Portfolio and The trade-off theory. The study employed descriptive research design. The study was carried out at firms listed at the NSE, Kenya with a population of 46 non-financial firms listed at the Nairobi Securities Exchange (NSE) as at December 2019. A census of 46 non-financial firms was considered. Secondary data was collected from annual reports of the non-financial companies listed at NSE and the NSE handbooks. Expert opinion was used to ensure data validity and reliability. The data was analyzed descriptively by means and the standard deviation, while multiple regression analysis was used to establish the influence between the variables. Regression results showed that cost of equity has a positive effect on financial performance as measured by Return on Assets (β = 0.2737, p = 0.0000); cost of preference shares affects investment decision negatively and significantly (β = -0.2430, p = 0.0015), and that the effect of cost of debt on investment decision is significantly positive (β = 0.2934, p = 0.0000). Given from the findings of the study that less than 34% of variations can be attributed to the cost of capital on investment decisions for the listed non-financial firms, this study has proved that effective working capital management practices will play a crucial role in improving the overall profit margins for the listed non-financial firms at NSE. In conclusion, cost of debt is a significant positive contributor to the investment decision of the non-financial listed firms at the NSE. The debts are essential when the firm is lacking finance in running its daily expenditure smoothly. The NSE and other regulating authorities such as the Capital Markets Authority (CMA) should therefore ensure that policies are put in place to help the firms manage their cost of capital efficiently. These policies must be in line with the Sustainable Development Goals (SDGs). These policies may include availing access to credit facilities and promoting trading in shares of the listed firms and these policies should be integrated with SDGs, which recognizes that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability.