The Effect of Corporate Governance and Capital Structure on Financial Performance of Firms Listed at the Nairobi Securities Exchange.

Abstract

Corporate failures have lately been experienced by firms in Kenya and these have been related to structures of corporate governance employed. The issues facing Uchumi and Kenya Airways is an indication that even listed firms are not insulated from this corporate failures. Although there are many studies carried out locally on corporate governance and financial performance, these researchers however has not tried to establish the collective effects corporate governance and capital structure has on organizations’ financial performance especially for those listed in Nairobi securities exchange. This creates a knowledge gap which this study sought to fill up. The focus of this research was to establish what effect capital structure and corporate governance has on the fiscal performance of firms that have been listed at the NSE. The study’s population was all the 64 listed firms at the NSE while the sample for the study was 24 firms listed at the NSE. The independent variables for the study were corporate governance as measured by board size, board composition, board committees and director’s shareholding. Capital structure was another independent variable and was measured by gearing ratio. Financial performance was the dependent variable which the study sought to explain and it was measured by ROA. Gathering of secondary data was conducted for a period of 5 years (January 2012 to December 2016) annually. The research design employed for this study was descriptive cross-sectional research design and a multiple linear regression model was used in analyzing the association between the variables. Data analysis was undertaken using the Statistical package for social sciences version 22. The results of the study produced R-square value of 0.249 which means that about 24.9 percent of the variation in the listed firms at the NSE financial performance can be explained by the five selected independent variables while 74.9 percent in the variation of financial performance of NSE listed firms was associated with other factors not covered in this research. The study also found that the independent variables had an average correlation with financial performance (R=0.499). ANOVA results indicate that the F statistic was significant at 5% level with a p=0.000. Therefore the model was considered fit to explain what relationship exists between the selected variables. The results further revealed that board size produced positive and statistically significant values for this study while board composition and capital structure produced negative and statistically significant values for this study. The study further found that board committees and director’s shareholding are statistically insignificant determinants of fiscal performance of NSE listed firms at the NSE. This study makes recommendations that measures ought to be put in place to enhance board size as this will improve financial performance of listed firms at the