The Effect of Debt Financing on the Financial Performance of Listed Companies at the Nairobi Securities Exchange

Abstract

This study aimed at examining the effect of choosing debt as the financing option to the financial performance of listed companies. The objective of the study was to ascertain the effect of debt financing on the financial performance of companies listed at the Nairobi Securities Exchange. The study adopted the quantitative research design. The data analysis was done using the SPSS tool to determine what relationship is there between debt financing and financial performance. Out of the 64 listed companies, data was obtained from only 51 companies. Insurance companies were excluded due to issues of regulation while other firms had not publicized their financial accounts. A five-year period from 2013 to 2017 was put into consideration. Financial performance was the dependent variable. Debt financing was the independent variable and firm size and tangibility were the control variables. The study revealed that 10% of the changes in the dependent variable can be well explained by the predictor variables. This shows that other variables not included in the study can account for 89.9% of the changes in the independent variable. From the study, a significant positive relationship exists between debt financing and financial performance. Firm size and tangibility were found to be statistically insignificant determinants of financial performance. Firm size was found to have a negative but insignificant effect on the financial performance .Tangibility had a positive insignificant effect on the financial performance of the listed firms. This study therefore concludes that debt financing which yields a tax advantage had a positive significant effect on the financial performance of listed companies in Kenya during the period of study