Financial Leverage and Financial Performance of Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

One of key financial decisions taken by firms to address challenges associated with achieving both short and long term goals is capital structure decisions. Different inferences have been made from theories of capital structure, where Modigliani and Miller concluded that debt was irrelevant to capital structure while agency theory emphasized the significance of debt in controlling management's activities. Both theoretical and varied empirical investigations disagree on the specifics of how financial leverage affects financial performance. The purpose of this study was to determine how financial leverage affected the financial performance of companies with NSE listings. The population of the study consisted of the 63 companies listed on the NSE. Nevertheless, the researcher was successful in gathering information from 62 of the 63 businesses, for a response rate of 98.4%. One of the independent variables in the study was financial leverage, which was determined as the ratio of total debt to total assets. Financial performance was the dependent variable, and return on assets determined it. Secondary data was obtained yearly for a period of five years (January 2017 to December 2021). A descriptive cross-sectional research design was adopted for the investigation. The data analysis was carried out using the SPSS application. The relationship between the variables was established using correlation and one-way ANOVA. Finally, it is established that there is a real relationship between financial performance and leverage level. According to this study, businesses should balance the debt expenses associated with borrowing with the tax benefits of bankruptcy when determining their capital structure. The study also suggests that companies with stock listed on the NSE keep adequate levels of liquidity because its results show that business liquidity has a favorable, significant impact on financial performance.