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

Abstract

Investment firms and other companies listed at the NSE continue to face countless challenges recently that brought debates on financial leverage of these companies. Listed investment firms face challenges in choosing the most optimal financing decisions that will help them finance their business operations. The goal of the study was to see how financial leverage affected the performance of NSE-listed investment companies. The study’s population included all 5 NSE-listed investment companies. Leverage, entail the total debt to total assets ratio in a particular year, was used as a predictor variable. Liquidity was assessed by current ratio, total assets natural log measuring company size, and age was gauged by duration the companies were in operation. Return on assets served as the response variable for financial performance. Secondary data was collected on a yearly basis for ten years (January 2011 to December 2020). The research variables were analyzed using a descriptive design. The results yielded a 0.467 R-square value, indicating that variations in the chosen independent variables account for 46.7 percent of changes in financial performance amongst investment firms, whereas other factors accounting for 53.3% of variance in financial performance amongst NSE listed investment firms. Independent variables recorded a good relationship with company performance (R=0.683) in this study. The F statistic was significant at 5% with p<0.05, according to the ANOVA results. This demonstrated that the overall model was effective in determining the variables' relationships. Leverage had a negative as well as statistically significant impact on financial performance, but liquidity as well as age had a positive as well as statistically significant impact on the performance of the NSE listed investment companies. In this research, the size of the firm had no statistical significance. This study recommends that NSE-listed investment companies should focus on achieving the best degree of leverage, improving liquidity positions, and improving age, as the three factors has a substantial impact on their financial performance.