The Effect of Lease Financing on the Financial Performance of Companies Listed at the Nairobi Securities Exchange

Abstract

The economic benefits of leasing can be derived from the firm's choice of leasing relative to borrowing and acquiring the asset. The essence of leasing is reflected in the proposition that leasing provides customized financing with potentially unique cash flow and tax features. Unlike borrowing, the ownership of the asset remains with the lessor and the lessor can deduct tax allowances generated by the leased equipment. The objective of the study was to determine the effect of lease financing on the financial performance of firms listed at the Nairobi Securities Exchange. This study adopted descriptive research design. The population of the study was all the 62 listed companies in the NSE but data for only 30 firms was available for the period under study. Secondary data was collected for the firms for the period 2009 – 2013 from the financial statements. The measures of financial performance was taken as the dependent variables while amount of Finance lease, operating lease, liquidity, size of the firm and leverage was taken as the independent variable. The collected secondary data was analyzed using Statistical Package for Social Science (SPSS) version 22. A regression analysis was conducted on the data set to determine the effect of leasing on the ROA for the firms listed at the NSE. From the regression results, lease financing and size of the firm had negative effects on ROA while liquidity and leverage had positive effects on ROA. All these effects were however insignificant at 5% level of confidence. The R2 showed that the model explained 2.3% of variance in ROA and it was not fit as the F-statistic was also insignificant at 5% level of significance. The study concludes that lease financing does not influence the financial performance of listed firms in Kenya. While the relationship could be negative, it failed the significance tests at all the acceptable levels of significance. Financial performance of firms in Kenya is therefore not affected by the level of lease financing. The study recommends that firms should be careful with the use of lease financing as a method of financing their operations as evidence suggests that no value is added through the use of lease financing. Some evidence suggested a negative relationship between lease financing and ROA which may suggest that lower levels of lease financing could be acceptable. It may therefore be important for the firms to examine what value lease financing may add to them when other financing options are available