Effect of Capital Structure on the Financial Performance of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

Company requires funds for financing its projects or investments in order to take care of its operations and also for its growth. Capital structure is very key in the shareholders wealth maximization and firm performance. A bad financial leverage decision will lead to high opportunity cost and as a result, this will lower the net present value of investment hence poor performance. The study sought to determine impact of capital structure on listed non-financial firm’s performance from 2011 to 2020. The study adopted descriptive research design. The study population was all the 52 non-financial listed firms from 2011 to 2020 at NSE. Secondary data were employed covering annual data from 2011 to 2020. The study found that leverage, firm size and liquidity explain 54.44% of financial performance of non-financial firms listed at NSE measured using return on assets. The coefficient of leverage had a negative and statistically significant relationship with financial performance of non-financial listed firms. In addition, firm size has a positive and significant relationship with financial performance of non-financial listed firms. Model results further indicated that the coefficient of liquidity had a positive and statistically significant relationship with financial performance of non-financial listed firms. The study concludes that use of debt to finance firms operations should be used with caution. The study concludes that firm size impacts financial performance of non-financial listed firms. Liquidity positively impacts the financial performance of non-financial listed firms. The importance of liquidity to firms’ performance results to the conclusion that it predicts the profitability margin of a firm. The study recommends for a balance in financing firms operations using equity or debt. Leverage increases the variability of the contractual cash flows. The study recommends that nonfinancial firms may need to diversify their products and services with aim of enhancing value aggregate assets. It further recommends that firms should make maximum use of their available resources for example assets to boost their profitability and effectively execute their core functions. The study recommends that firms should consider balancing between financing a firm using short term liabilities and long-term liabilities.