Effect Of Debt Financing On Financial Performance Among Firms Listed At Nairobi Securities Exchange

Abstract

The aim of this study was to examine the effect of debt financing on financial performance of listed firms at the Nairobi Securities Exchange. The agency theory, pecking order theory, trade-off theory, Modigliani and miller theory were adopted for the study. A descriptive design and was used in the study and the population entailed the 35 non-financial firms listed in the Nairobi Securities Exchange that had complete data for the period covering 2014 to 2018. To carry out the study secondary data was used which was extracted from the targeted firms financial statements and reports. Analysis of data was carried out through descriptive statistical techniques, correlation analysis and the multiple linear regression. The findings revealed that debt financing had a weak negative correlation that was significant (r= - 0.208, p=0.006) .Firm liquidity had a significant positive and weak correlation (r= 0.205, p= 007). Firm size had a weak negative but insignificant correlation (r= -0.030, p= 0.692).While asset tangibility had a strong negative but insignificant correlation (r=-0.092, p=0.227).The study concluded that financial performances of non-financial firms that are listed at the Nairobi Stock Exchange are affected negatively and significantly by debt financing. The study also concluded that firm liquidity positively and significantly affects financial performance by non-financial firms listed at Nairobi Stock Exchange. Further, firm size and asset tangibility affected negatively but insignificantly on financial performance of the non-financial firms. The study thus recommended that the management of non-financial firms have to ensure they hold optimum level of debt to ensure that they do not affect other functions of the firm. The study also made recommendations that the management of non-financial firms should ensure that their firms are liquid enough to ensure that they can meet their obligations as they fall due so as to attract investors for the improved financial performance of the firms.