The Effect of Financial Leverage on Profitability of Listed Agricultural and Manufacturing Firms in the Nairobi Securities Exchange

Abstract

Different scholarly works have assessed the effect of financial leverage on profitability at the NSE and in different sectors giving conflicting findings. Moreover, few researchers have focused on combined agriculture and manufacturing sectors as a context of their study. The objective of this research was to determine the effect of financial leverage on the firm’s profitability in agricultural and manufacturing firms at the NSE. An Unbalanced panel data was gathered for a period of 10 years, that is between January 2009 to December 2018 after sorting and cleaning. Secondary data was acquired from the audited financial statement of agricultural and manufacturing firms at the NSE for the ten years published in NSE handbook. The research design employed was descriptive. The specific data collected was profitability of the firms in terms of ROA, financial leverage in terms of total debts divided by equity, liquidity in terms of current ratio, and size of the firm in terms of the natural log of market capitalization for firms listed under agricultural and manufacturing at the NSE. The three-technique employed for analysis are descriptive, correlation and regression analysis. Specifically, LSDV with fixed effect regression model was used after determining it is the appropriate model to use after carrying out Hausman test. The finding was that financial leverage and firm size had a negative but statistically insignificant effect on profitability. In contrast, the current ratio had a positive but statistically insignificant effect on the profitability of firms in agricultural and manufacturing at the NSE. The study conclusion was that the effect of financial leverage was insignificant in firms under agricultural and manufacturing firms at the NSE. Further research is required to be carried out on the different sector of the economy to establish how the effect of financial leverage influence profitability besides firms agricultural and manufacturing firms at NSE.