Relationship between capital structure and performance of non financial firms listed at the Nairobi securities exchange
Abstract
The choice between debt and equity financing has been directed to seek the optimal capital structure.
Several studies show that a firm with high leverage tends to have an optimal capital structure and therefore
it leads it to produce good performance, while the Modigliani-Miller theorem proves that it has no effect on
the value of firm. The importance of these issues has only motivated researchers to examine the
relationship between capital structure and firms financial performance. The objective of this study was to
establish the relationship between capital structure and financial performance of non-financial firms listed
at the Nairobi securities exchange in Kenya between the period January 2008 to December 2013.Financial
performance was measured by return on equity while capital structure was measured by debt ratio. Other
control independent variables: Tangibility of assets, size of the firm and the growth of the firm. It is
important to note that during this period Kenya experienced political anxiety, leading to uncertainty in the
securities market. This presents an interesting period of study considering the ups and downs of the trade
cycle in the securities market. The beginning of this period also experienced the global financial crisis
which was witnessed in the period around 2008-2009.The population of study consisted of all the 40 nonfinancial
firms listed and duly registered with capital market authority of Kenya. Secondary data used was
obtained mainly from the annual audited and published books of accounts, financial statements and the
NSE. Data analysis was done by use of regression analysis model with the help of a computer that was
used to analyze regression statistics, Analysis of Variances and coefficients or gradients of variables and
the constant. From the study, there exists a linear significant positive relationship between financial
performance of the firm and debt ratio. Also, there is a positive insignificant relationship between financial
performance and tangible assets. However, the results show that there exists a linear insignificant negative
relationship between financial performance of the firm and size and growth of the firm.
Citation
School of Business,Publisher
University of Nairobi
Description
Thesis