Effects of Capital Structure on the Financial Performance of Energy and Petroleum Firms Listed at the Nairobi Securities Exchange

Abstract

Decisions regarding the appropriate mix of equity and debt or the financing options to investments and operations result to a given firm’s capital structure. Subpotimal financial choices may lead to business collapse if not addressed. An efficient finance choice is one that maximizes wealth and minimizes the impact on corporate performance. In this research, the impact of capital structure on financial performance of energy and petroleum companies listed on the Nairobi Securities Exchange was investigated. Also, it reviewed the growing collection of theoretical and empirical research on capital structure and financial reporting quality. The present investigation was influenced by capital structure irrelevance, pecking order, and tradeoff theories. The present study was descriptive in nature. The target demographic was the Nairobi Securities Exchange's four listed energy and petroleum corporations. The research used a census to look at the complete population. From 2016 through 2020, data were gathered for yearly analysis. For the research, OLS was used to estimate the association between capital structure, company size, and age. It measured financial performance and capital structure. The research found a substantial association between debt to equity ratio and business size. A negative substantial association exists between Debt to Equity and Firm Size. Contrary to expectations, the research found no link between firm age and ROA. Less than 1% of the variance in ROA is explained by the model including debt to equity ratio, business size, and age. It also forecasts financial success using the debt to equity ratio, business size, and age. Ultimately, only firm age is linked to ROA. The two variables are related. So the debt to equity ratio and business size have no meaningful impact on ROA. Government officials and policymakers in the financial industry, especially regulators, the Capital Markets Authority (CMA), and the Treasury, should concentrate on financial deepening rather than capital structure or company size when attempting to increase business value. It should focus more on other determinants of firm profitability, and consequently, firm value. Additional recommendations are made to the policy makers to mainly focus on firm size when endeavoring to boost firm value, and by financial deepening in the capital markets, in order to boost the credibility of the capital markets. Thus, firms that are listed should have been substantially been in operation for some time. Recommendations are generated to the financial analysts not to mainly utilize capital structure and firm size when analyzing the financial statements of listed firms when trying to estimate their future returns and value. They should focus more on other determinants of firm profitability, and consequently, firm value. However, additional recommendations are generated to the financial analysts to utilize firm age when analyzing the financial statements of listed firms when trying to estimate their future returns and value. Finally, recommendations are generated to consultants and listed firms practitioners not to mainly utilize capital structure and firm size when trying to bolster firm profitability and value. They should focus more on other determinants of firm profitability, and consequently, firm value