Effects Of Capital Structure On Financial Performance Of Insurance Companies In Kenya

Abstract

Financing decision is the backbone of any company and highly impacts on performance. If decisions are not well done may lead to decline of performance. This research sought to examine the effect of capital structure on financial performance of insurance companies in Kenya. Financial performance was measured using Return on equity while capital structure was measured using debt equity ratio. In addition, liquidity, tangibility of assets and firm size were used as the control variables. Three capital structure theories were adopted, includes; trade off theory, Modigliani and miller theory, pecking order theory and agency theory. The study covered 37 general insurance firms and a six-year period data was analyzed; from 2013 to 2018. The study approved a descriptive design using panel data. Secondary information was collected from Insurance Regulatory Authority published handbooks. Information was then evaluated using multiple linear regression model in statistical package for the social science. The results showed that insurances’ financial performance variable Return on equity is significantly affected by capital structure with negative correlation between the two. The strong and negative correlation coefficient implies capital structure of insurances has an influence on financial performance for the period considered. Asset tangibility has a negative but insignificant influence on ROE. The findings also indicated increased liquidity ratio leads to significant increase in ROE. The firm’s size on the other hand had a positive relationship with financial performance in insurance companies. The study concluded that increased debt ratio cause a decrease in equity returns to a significant extent. The study recommends that the management of the firms should ensure they maintain adequate level of debt to ensure that they do not affect other functions of the firm. It also recommends insurance management maintain the current liquidity position to ensure short term obligations are met. It also recommends insurances enhance the companies’ total assets as it affects overall ROE.