Effect of Leverage on Earnings Quality Among Commercial Banks in Kenya

Abstract

Leverage and earning quality have been very paramount in the commercial banks. The fundamental aspect of commercial banks is the earning quality. It is crucial in the provision of relevant and accurate information to the investors. The banking sectors have undergone several milestones and evolved to reach the current state. Leverage and earning quality have been the pivotal areas. Earning quality has been the area of consideration for the investors in the current fast-paced commercial environment. The research sought to investigate the effects of leverage on the earning quality of the commercial banks in Kenya. The research was anchored by the trade-off theory, pecking order theory and agency theory. Trade-off Theory stipulated the ability of the company to work sufficiently and adequately in optimizing debt-equity. Pecking order theory indicated that banks do not have one specific capital finance hence relies on the decision making. Agency theory anchored the principal-agent mandate assigned by the shareholders, and the need to maximize shareholder’s wealth in the banking industry. The determinants of the study included degree of financial leverage, banks size, management efficiency, and credit management. The study optimized descriptive research design for the 42 commercial banks in Kenya. The data sourced run for 5years spanning from 2016 to 2020. The analysis considered was linearity, normality, autocorrelation among others. The data was collected through secondary method and was taken through systematic steps before analysis. The research postulated that degree of financial leverage, management efficiency, and credit risk management had negative correlation with the earning quality. The bank size had positive association with the earning Quality.