The Effect of Ownership Structure on Financial Leverage of Non-financial Firms Listed at Nairobi Securities Exchange

Abstract

Ownership structure leads to agency problems since majority shareholders have incentives and thus monitor actions of the management and influence on decisions. There has been a growing debate on whether ownership structure impacts on management decisions. This study was set out to determine the effect of ownership structure on financial leverage of listed non-financial firms at NSE. The study used correlation and regression analysis to establish existing relationship between ownership structures and financial leverage. The study was guided by agency theory and descriptive research design. The study population involved 50 listed non-financial firms as at 31st December, 2017 that were operational in the study period. Secondary sources of data spanning for a period between 2012 and 2016 were used. Analysis of data was executed using descriptive and inferential statistics: correlation and regression analysis. It was found that ROA and firm size recorded a gradual increase while ownership structures (institutional, managerial, state and foreign) recorded a slow increase over the study period. The study found no correlation among ownership structures (managerial, state, foreign and institutional), size of firm, ROA and long-term debt. Further, there was no correlation between ROA, firm size and financial leverage. Results from regression analysis established that the coefficient of determination was 3.6%, implying that the regression model used was a poor predictor. However, analysis of variance was 0.048; implying that it was statistically significant. Ownership structures (managerial, state, foreign and institutional) were negatively linked to long-term debt. Likewise, ROA was negatively linked while size of the firm was positively linked to long-term debt. Managerial, state and foreign ownerships and profitability were insignificant while institutional ownerships and logarithm of assets were significant.