Effect of Capital Structure on the Financial Performance of Non-financial Firms Listed at the Nairobi Securities Exchange
Abstract
Company requires funds for financing its projects or investments in order to take care of its
operations and also for its growth. Capital structure is very key in the shareholders wealth
maximization and firm performance. A bad financial leverage decision will lead to high
opportunity cost and as a result, this will lower the net present value of investment hence poor
performance. The study sought to determine impact of capital structure on listed non-financial
firm’s performance from 2011 to 2020. The study adopted descriptive research design. The study
population was all the 52 non-financial listed firms from 2011 to 2020 at NSE. Secondary data
were employed covering annual data from 2011 to 2020. The study found that leverage, firm size
and liquidity explain 54.44% of financial performance of non-financial firms listed at NSE
measured using return on assets. The coefficient of leverage had a negative and statistically
significant relationship with financial performance of non-financial listed firms. In addition, firm
size has a positive and significant relationship with financial performance of non-financial listed
firms. Model results further indicated that the coefficient of liquidity had a positive and statistically
significant relationship with financial performance of non-financial listed firms. The study
concludes that use of debt to finance firms operations should be used with caution. The study
concludes that firm size impacts financial performance of non-financial listed firms. Liquidity
positively impacts the financial performance of non-financial listed firms. The importance of
liquidity to firms’ performance results to the conclusion that it predicts the profitability margin of
a firm. The study recommends for a balance in financing firms operations using equity or debt.
Leverage increases the variability of the contractual cash flows. The study recommends that nonfinancial
firms may need to diversify their products and services with aim of enhancing value
aggregate assets. It further recommends that firms should make maximum use of their available
resources for example assets to boost their profitability and effectively execute their core functions.
The study recommends that firms should consider balancing between financing a firm using short
term liabilities and long-term liabilities.
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1556]
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