Effect of Financial Leverage on Share Return of Non-financial Firms Listed in Nairobi Securities Exchange
Abstract
Capital structure decision is among the key financial decisions that are taken by firms
because financial leverage has an effect on the share return. Theoretical foundations on
capital structure have found different conclusion where Modigliani and Miller argued on
the irrelevance of debt on capital structure and agency theory to stress on the importance
of debt in capital structure to control the actions of management. No agreement exists on
the nature of the effect of financial leverage on share return from both the theoretical and
different empirical studies. The aim of this study was to ascertain the effect of financial
leverage on share return of non-financial firms quoted at the NSE. The population for the
study was all the 40 non-financial firms listed at the NSE. However, out of the 40 nonfinancial
firms, the researcher managed to get data for 39 companies amounting to 97.5%
response rate. The independent variables for the study were financial leverage measured
by the ratio of total debt to total assets; financial performance was measured by return on
assets, liquidity measured by current ratio and firm size measured by a log of total assets.
Share return was the dependent variable and was measured by change in total return.
Secondary data was collected over a five 5 year time frame (January 2013 to December
2017) annually. The descriptive cross-sectional research design was employed for the
study. Data analysis was undertaken using the SPSS software. The relationship between
variables established using multiple linear regression analysis and correlation analysis. The
study found that the independent variables had a correlation with share return of nonfinancial
firms listed at the NSE (R=0.450). ANOVA results show that the F statistic was
significant at 5% level with a p=0.000. Therefore the model was fit to explain the
association between the selected variables. From the research findings, it is evident that
firm size produced positive and statistically significant values for this study (high t-value
(6.387), p < 0.00). Financial performance and firm liquidity produced positive but
statistically insignificant values for this study as shown by p values that are more than 5%.
Financial leverage produced negative and significant values for this study as shown by a p
value 0.021<0.05. This study recommends when firms are setting their capital structure
they should strike a balance between the tax savings benefit of bankruptcy and debt costs
associated with borrowing. The study also recommends that non-financial firms quoted at
the NSE should maintain adequate levels of liquidity as the findings of this study depict a
positive significant effect of firm liquidity on share return.
Publisher
university of nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesAttribution-NonCommercial-NoDerivs 3.0 United States
Usage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/http://creativecommons.org/licenses/by-nc-nd/3.0/us/
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