Effect of Financial Decision on Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

The listed firms at NSE have been recording mixed results and that places a question on their financing decisions. Over the last decades, NSE has delisted the companies that have been experiencing poor performance. The poor performance has been linked to financing decisions. This worrying trend in the corporate performance of the listed firms warranted a relook into the financing decisions of firms listed at NSE since despite this performance; most studies have focused on financial restructuring and not decisions. This study hence sought to establish the effect of financing decision on financial performance of listed companies in Nairobi Securities Exchange. The study was hinged on the Corporate Finance theory, Operating Cycle theory, Agency theory and Risk and Return Trade off theory. A descriptive research design was used. The target population of the study was the 66 listed firms at the NSE by the year ending December 2016. The study collected secondary data using a secondary data which was analyzed using correlation and regression analysis. The study findings revealed that leverage decision is an important financial decision among listed firms at NSE. A firm with a better balance between debt and equity financing performs better than a firm which doesn’t balance between debts and equity modes of financing. The findings also showed that investment decision is another important financial decision among the firms listed at NSE. Firms which have invested heavily in property, plant and machinery perform better than firms which have not. Furthermore, dividend decision is not very important financial decision among firms listed at NSE. The decision to pay dividends doesn’t have a significant effect on the firm performance of the listed firms. Other decisions that are key is working capital, investment and leverage decisions. The study recommends that listed firms should consider having leverage decisions which are mainly centered on balancing between debt and equity balancing or those decisions that support debt financing more than equity financing. Debt financing is especially better when a firm is in a financial crisis due to its ability to have tax shield. The study also recommends listed firms to have investment decision that supports investment in fixed assets such as property, plant and machinery in order to enhance their returns on assets. The study further recommend that listed firms can consider focusing on working capital decisions that support a balance between current assets and current liabilities or those that support more current asset to liabilities in order to record improved returns on assets. Having more current assets can enable a firm to run more smoothly and be able to offset its short term debts.