Effect of Capital Structure on Stock Returns of Non-financial Firms Listed at Nairobi Stock Exchange

Abstract

For the purpose of this study, a descriptive research approach was utilized, and the sample population consisted of 47 non-financial firms that were listed on the Nairobi Security Exchange between January 1, 2015 and December 31, 2020. A collection sheet was developed with the help of secondary data taken from the financial accounts that were submitted to the CMA. In order to do the analysis, the user-friendly software known as SPSS was utilized. The data was entered in SPSS to aid descriptive, correlation, and regression analysis procedures. The variables studies proclaimed a weak but positive association for profitability and liquidity verse the stock return as elaborated by (r=0.030, p=0.616) and (r=0.425, p= 0.001) consecutively. Firm size recorded a strong positive association with the stock return as blueprinted by (r=0.892, p=0.001). In addition, debt ratio registered a negative association with the stock return as expounded by (r=-0.250, p=0.00). This study findings give detailed information about the regressor variables (Liquidity, Debt Ratio, Profitability and Firm Size) verse the regressed variable (Stock Returns). Therefore, R (Correlation Coefficient) is 0.927. This implied that there was 92.7% correlation between the variables. R Square (Co-efficient of determination) is 0.859. This insinuates that 85.9% of variation in stock return is explained by the explanatory variables (Liquidity, Debt Ratio, Profitability, and Firm Size). The remaining percentage, 14.1%, are factors not cited. The findings illustrated that if all factors are kept constant, the autonomous value stands at negative 5.046. Additionally, increase in one unit of debt ratio triggers a decrease in stock return by 5.4% all variables maintained constant. Moreover, an increment of a single unit of profitability translates to increment in stock return by 125.7% if all factor remains constant. Furthermore, an increment in firm size by a single unit causes the elevation of stock return by 73.3% when all variables are kept constant. In addition, a unitary addition of liquidity translates to increase in the stock return by 30.2%. The findings have been summarized in the multiple linear regression below. The study recommends for minimal relies on debts ratio since it reduces the stock returns. Moreover, the research can analyze the influence of corporate governance on the unpredictability of stock prices, inflation and stock fluctuation, firm characteristics and stock prices as well earning management verse the stock returns.