Debt-Equity Ratio and Financial Performance of Listed Companies at the Nairobi Securities Exchange, Kenya

Abstract

Firm financial performance is essential for corporate survival and prosperity. Financial leverage may be used to enhance corporate financial performance, but it can also occasion financial distress and bankruptcy if not carefully managed. At the Nairobi Securities Exchange, a number of firms face poor financial performance, and financial distress, commonly associated with excessive leverage and bankruptcy. The purpose of this study was to determine the effect of debt-Equity ratio on financial performance of listed companies at Nairobi Securities Exchange. The study was grounded on dynamic tradeoff and pecking order theories. Positivist research paradigm with explanatory design using linear regression model on panel data obtained from a survey of 38 listed companies at Nairobi Securities Exchange over the period 2010 to 2019 was used. The data was mined from financial statements filed at the Nairobi Securities Exchange. Controlling for Firm size, Sales growth and operational efficiency, the study found Debt Equity ratio (ꞵ= -.1633009 p= 0.000) negatively related to Return on Equity and statistically significant at 0.05. The study recommended reduction in long-term or short-term debt or both or increase in equity finance for overall reduction in debt-equity ratio to enhance Return on Equity. Further, the study recommends deepening of Kenya’s capital market to permit optimal capital structure adoption by firms. The study contributes to knowledge by establishing the state of financial leverage at Nairobi Securities Exchange, to policy by establishing the need for deepening of capital market at NSE and to theory by confirming the relevance of dynamic tradeoff and pecking order theories at the bourse. The study scope was limited to firms listed at NSE. A similar study covering East Africa capital market is recommended. Further, a study to explore the limiting factors in Kenya’s capital market is recommended.