Effect Of Financial Leverage On Stock Returns For Companies Listed In Nairobi Securities Exchange

Abstract

Finance operations of an entity are financed by debt, equity and internally generated funds which make up the capital structure of an entity. Equity are funds which are contributed by the owners of an entity. Equity comprises of retained earnings and share capital. Debts are funds which are contributed by creditors of an entity. Debt is a liability to an entity that has borrowed the funds since they have an obligation to make payment ones it matures. This study therefore assessed the influence of financial leverage on stock returns for companies listed in Nairobi Securities Exchange. From a target population of 47 non-financial companies listed at NSE, the researcher utilized descriptive research approach. Data was retrieved from yearly financial statements and reports for non- financial entities listed between the years 2012 to 2017 for analysis. Full data was however obtained from 38 firms making up a rate of response of 80.85%. The 80.85% rate of response was considered adequate for the study. It was uncovered that leverage has positive linkage with stock returns for firms recorded at NSE anyway the alliance was not basic. Further, the association between firm size and stock returns was negative and not quantifiably noteworthy. Generally, profitability and returns demonstrated a significant and positive association for the organizations listed at NSE. The recommendation of this study is that board of directors for listed non-financial firms ought to ensure they have optimum debt levels so that the entity remains solvent. In addition, management of listed entities should ensure they invest in fixed assets to enhance size of their organizations and gain the benefits of economies of scale. Further management of listed non-financial entities should focus on increasing profitability of their firms for enhancing the entities share value and shareholder’s wealth.