The Effect of Debt Management on the Performance of Firms Listed on the Nairobi Securities Exchange

Abstract

The effect of capital structure and its contribution towards financial performance has attracted the interest of academic researchers. However, little focus has been given to debt management as an influencer of financial performance in the corporate world. Extreme debt levels have resulted in some of the listed firms being placed under receivership. Previous research work on the influence of debt management on financial performance of firms have yielded varied and sometimes conflicting results. While Ngobo and Capiez (2004) and Goddard (2005) demonstrated a adverse effect of debt on financial performance, Berger and Bonaccorsi (2006) indicated a positive impact. This study was aimed at determining the impact of debt management on the financial performance of organizations listed on the Nairobi Securities Exchange. The study focused its attention on the 54 firms listed on the Nairobi Securities Exchange excluding the nine (9) listed companies under the commercial and services segment. The research used descriptive and inferential statistical in evaluating the data attributes, constructing a correlation matrix between the dependent and independent factors, and deciphering the outcomes utilizing the Statistical Package for Social Sciences (SPSS) version 21. The investigation found that debt proportion and size of firm have a positive correlation to financial performance while the current ratio and the solvency ratio has a negative association with the financial performance. The correlation coefficient of debt ratio was 0.739 which signified a strong positive connection between debt management and financial performance of the listed firms. The correlation coefficient of the current ratio and solvency ratio of -0.339 and -0.471 respectively showed a weak negative relationship between liquidity and solvency and financial performance of the listed firms.