The relationship between leverage and investment decisions for companies quoted at the Nairobi Stock Exchange

Abstract

The aim of this study was to establish the relationship between leverage and investment decisions for companies listed at the Nairobi Stock Exchange. Debt holders are worried when companies engage in investments decisions that are a departure from the normal operations of the business because they are not sure of the returns from these projects and in turn it may jeopardize the ability of the company to meet its debt obligations as and when they fall due.

The study aimed at determining the relationship between the level of leverage and the amount of extra cash that can be committed on diversification investment decisions by companies that are listed at the Nairobi Stock Exchange. The diversification investment decisions that were considered in this study were those that involve investments in new products, investments in totally new service lines and venturing into new geographical areas with different political and economic environments. Data was obtained from annual statements of listed companies.

The study covered a five year period from ~005 to 2009. Linear regression method was used to identify the existence of the relationship. The findings of the study indicated that about 36% of the listed companies engage in diversification investment decisions. It further found out that there is a very weak relationship between the levels of leverage of a company and how much money the company can commit to a diversification investment decision. This insinuates that companies view each diversification investment decision on their own merit and how much money is committed to an investment decision is not entirely dependent on the level of leverage of that company.