Effect of Financial Leverage on Financial Performance of Investment Firms listed at Nairobi Securities Exchange

Abstract

Despite the growth in the Kenyan banking sector, financial leverage remains a major factor of financial performance. The choice of debt financing by investment firms listed at NSE can be advantageous or can lead to financial distress depending on how the finances are utilized by the finance managers. Prudent allocation and use of the borrowed funds lead to improved financial performance. This investigation tries to address the impact of leverage on performance of investment firms in listed at NSE using net income, total assets, total liabilities, current assets and current liabilities from 2009 to 2018. Central Bank of Kenya, CMA and financial statements and annual reports for individual investment firms were the key data sources. Descriptive statistics and correlations between the factors were done. ANOVA and F-test at 5% level of significance level was utilized to decide the regression model significance while adjusted R-square, was utilized to establish the degree of variability in financial performance explained by size of firm, leverage, and liquidity. The study results revealed performance of investment firms listed at NSE is significantly influenced by financial leverage. Therefore, investment firms should select a composition of debt and equity finances so as to adjust the cost and benefit of debt. This is because at disequilibrium a levered firm may appear to have a higher value which will not persist for long at this firm and the levered firm is overvalued and therefore the investors in this company will attempt to make switch from a levered firm to unlevered firm.