Effect of Financial Leverage on the Financial Performance of Non-financial Firms Listed at Nairobi Securities Exchange

Abstract

Financial decision is driven by the maximization of shareholders’ value. Financial leverage is operationalized to enhance business productivity, create value to shareholders and increase its going concern. In addition, the financial performance strategies are spearheaded by the demand to upgrade the value through the maximization of assets to generate revenue. Despite the crucial impact of financial leverage, there have been minimal regards and concentration. The study was motivated to undertake key scrutiny of the effect of financial leverage on finance the financial performance. The theories that anchored the study are pecking order theory which stipulated the procedural techniques in sourcing funds. Trade-off theory accentuated the optimum level for debts verse equity, and resource dependency theory reinforce importance of resources at the disposal. The leverage was operationalized using debt to equity while performance maximized ROA. Correlation analysis provided deeper insight to the study. From the findings, liquidity posted a negative significant association towards financial performance (ROA) of (r=-0.048, P= 0.458). Business risk and leverage recorded positive correlation with ROA. Business risk portrayed weak positive association as implied by (r= 0.075, p=0.248) and Leverage recorded strong positive correlation as seen in (r = 0.890, p=0.000). Regression analysis R value was 0.909. This blueprints a 90.9% strong correlation among the factors in the research. R- Square of 0.826 depicted that 82.6% of deviation in financial leverage is elaborated by leverage, business risk and liquidity. 17.4% of variation in financial leverage is explained by factors not included in this research. ANOVA posit that P value was at 0.001, hence, below the P-value therefore implying that the model is statistically significant. The study assessed multicollinearity, linearity and autocorrelation and gave green light for more analysis since the data observe the research rules. The coefficient of determination computation states a unit change in liquidity has a negative impact on financial performance of 2.2%. Moreover, an increment of business risk increase the financial performance by 49.6%. Moreover, an advancement of leverage by one unit translated to 58.5% financial performance when all factors are held at constant. Further to the findings, the F Statistics is at 0.001, this implies that the model is good fit. The study recommended for policy formulation that suit each sector. Moreover, the study recommended for policies that addresses optimum financial leverage to increase maximization of assets. The study focused on the non-financial sector due to limited coverage by the preceding scholars. It is imperative to stipulate for more research undertakings on financial liabilities, short-term debts and financial fragility