Effect of Capital Structure on Financial Performance of Insurance Companies Listed at the Nairobi Securities Exchange

Abstract

The optimal capital structure levels and capital structure decisions that impact on the how a firm performs have been a great dilemma for many. Capital structure decisions have an impact on the growth and profitability of a firm as these decisions enable firms maximize their shareholder’s wealth. The research objective was to determine the effect of capital structure on financial performance of insurance firms listed at the NSE. To justify the research findings, descriptive research design was used to describe the relationship between the dependent variables and independent variables. Data collected for examination purposes was purely secondary as it was extracted from annual reports and financial statements of the listed firms. The target population was all the insurance firms listed at the NSE. Six firms were listed and formed part of the study’s population. Data analysis was done via multiple regression analysis, descriptive statistics and correlation analysis. For the significance level to the hypothesis a confidence interval of 95 percent was used. The analytical model used was financial performance as the dependent variable takin ROA as the measure. Debt ratio, size of firm and liquidity were the independent variables. The financial ratios were calculated by use of Microsoft Excel spreadsheet using data obtained for six year period (2011-2016). The findings show debt ratio having a notable impact on the ROA of insurance companies. Size of the firm was found to have an insignificant negative relationship with the return on assets on the other hand liquidity was found to have a positive and significant relationship with financial performance of the insurance firms as measured by return on assets. The findings reveal that capital structure affects financial performance of insurance firms at the NSE. In view of this it is recommended that if the insurance firms are capable of funding their operations through retained earnings should do so and reduce on undertaking borrowings as this will boost their overall performance.