Relationship Between Use Of Interest Bearing Debt And Financial Performance Of Listed Firms In Kenya

Abstract

Company financial performance has emerged to be a key issue in addition to other goals firms exist to meet. This study aimed at studying the relationship between the use of interest bearing debt and financial performance of listed firms in Kenya. The researcher did this study in addition with other possible factors that can influence the financial performance of listed firms in Kenya. The other variables studied were the size of the firm, number of directors, extend of audit work and the working capital management. The research has established that use of interest bearing debt has a positive significant effect on the financial performance of listed firms in Kenya. Based on this finding, managers should not have a negative attitude towards loans as if well utilised they will increase financial performance which forms a good basis for shareholder wealth maximization. Policy makers should also base their decision making on this research finding to make debt markets more accessible as they increase financial performance of economic units which will in turn increase the status of the economy as a whole. More specifically, the government should maintain the interest rate capping and expand the control to cover all credit facilities in the country in order to enable the positive impact be felt. The r3search agrees with the policy makers that cheap loans will be more accessible and will increase the economic performance in the whole economy. It was also established that the extend of audit function as measured by the audit cost, management of working capital and the board size affect firm financial performance in a way. Whereas the audit function affects the financial performance positively, the liquidity levels and big board sizes affect the financial performance negatively. Based on these findings, it is very important that organizations recheck on the importance of their board sizes. Organizations should also try to have a good mix of expertise at the top. The research findings suggest that having a small board size will be better and supports the notion that big board sizes compromise decision making processes. Research findings also suggest that too much liquidity affects financial performance negatively. Based on this, the researcher recommends having the minimum possible liquid assets to optimise on them. Available cash can be held in an interest earning form to boost financial performance. Audit function in Kenya have been found to impact positively on the financial performance in Kenya. Based on this, corporations are encouraged to seek the services of auditors beyond the statutory requirement to boost their financial performance. These research findings forms a basis for other researches which needs to be done to establish the whys behind the negative relationships for the board size and the liquidity positions.