Effect of Financial Leverage on Investment of Non Financial Firms Listed at the Nairobi Securities Exchange

Abstract

Investment is a vital economic activity in the corporate finance theory. The key to maintaining and increasing the capital stock and production capability of an organization is investment. Generally, investment is narrowly related to the intensity of economic activity and development. The aim of this study was to determine the impact of financial leverage on investment of non financial firms listed at the Nairobi securities exchange. The agency theory, the q theory of housing investment and the trade off theory were adopted for the study. A descriptive design and was used in the study and the population entailed the 46 non-financial firms listed in the NSE. To carry out the study secondary data was used which was extracted from the targeted firms financial statements and reports. Analysis of data was carried out through descriptive statistical techniques, correlation analysis and the multiple linear regression. The findings revealed that the association linking debt ratio and investment is positive but insignificant and that the relation between profitability, sales growth and investment ratio was negative and insignificant. The findings further established that a negative and considerable relationship existed between liquidity and investment. The study concluded that investments by non-financial firms that are listed at the Nairobi Stock Exchange are not affected by financial leverage, sales growth and profitability. The study also concluded that liquidity significantly affects investments by non-financial firms listed at Nairobi Stock Exchange. The study recommended that the management of non-financial firms have to ensure they hold adequate level of financial leverage to ensure that they do not affect other functions of the firm. The study also made recommendetions that the management of non-financial firms should ensure that their firms are liquid enough to ensure that they can make investment decisions.