Effects Of Financial Structure On Financial Performance Of Listed Non-financial Firms In Kenya

Abstract

In view of the key roles played by listed firms in an economy, it becomes very important that their financial soundness and viability is maintained. This is only possible if the different factors that play to affect listed firm’s financial positions are known. This research work sought to establish the effect of capital structure on the financial performance of listed firms in Kenya. An exception was made on the financial firms as they have high liquidity which can make their financial structures very peculiar and specific to their industries. Data was collected for 5 years ending with the year 2018 and in total, 47 companies were studied. The factor was studied alongside other factors as literature review identified other factors with possible effect on financial performance. Such factors are the corporate governance characteristics as measured by the number of directors, use of interest-bearing debt as measured by the amounts of interest payments, liquidity positions as determined by the current ratio and the firm size as measured by the amount of assets held by a firm. The study established that the factors actually affected the financial performance of the listed nonfinancial firms. The study established that the factors were relevant and they affected the financial performance in a way. Their effect was found to account for 12.55% of the variations in performance of companies. More equity in the capital structure was found to affect financial performance positively. The effect was that, for every unit increase in equity ratio, there was, a corresponding 0.62 units increase in financial performance. Board size and use of interest-bearing debt were found to affect financial performance negatively. For every unit increase in board size, there is a decrease in financial performance by 0.08 units while unit increase in interest expense decreases financial performance by 0.06 units. Firm liquidity and size were found to impact positively on performance. Unit increase in liquidity and firm size caused a corresponding increase in financial performance by 0.04 and 0.23 units respectively. The impact of board size and firm size were significant while liquidity, capital structure and interest-bearing debt were insignificant. The factors had p-values of board size (0.049), liquidity (0.570), capital structure (0.070), firm size (0.017) and interest-bearing debt (0.364). These findings indicate that counties need to optimise on use of equity in their capital structures and use less of interest- bearing debts. The management in these companies also need to be more liquid to advance financial performance by taking advantage of opportunities emerging and enhance their size to take advantage of economies of scale. The companies also need to relook into the composition of their boards in terms of expertise as currently, the boards and causing a negative performance although it’s insignificant.