Financial Leverage and Value of Firms Listed at the Nairobi Securities Exchange.

Abstract

Investors both as a firm and households are keen to create more wealth and value from their investments. However the financing decision debate on whether gearing amplifies the value of the firm has never yielded desirable optimal levels. Some companies like Deacons and Athi River Mining remain suspended from the Nairobi Securities Exchange. Equally the companies actively trading declare relatively small magnitude of earnings per share and report losses in consecutive financial years. This study sought to examine the effect of financial leverage on the value of firms listed on the NSE from the year 2016 to 2020.A literature review of the MM-theory, trade-off, pecking and agency theories provided an understanding of financing decision. Research methodology was designed using the descriptive cross sectional study for a population of all the firms listed on the NSE. A a sample of 42 firms was used from which secondary financial data was extracted .The data was recorded and coded using Excel and analyzed the descriptive and inferential tests using the Statistical package for social sciences (SPSS) .Results showed a mixture of results with overall debt having a significant negative relation to the earnings per share while debt-equity ratio, liquidity and firm size revealing a significant positive relation to the EPS as a measure of firm value. The adjusted R square value of 0.226 revealed that 22.6% of variation in the value of the firm is accounted for by changes in the selected independent variables while 77.4% result from other variables not incorporated in the model. It was concluded that financial leverage negatively affects the value of firms listed on the Nairobi Securities Exchange.