Effect of Capital Structure on the Financial Performance of Energy and Petroleum Firms Listed at Nairobi Securities Exchange

Abstract

The capital structure of a firm is simply the composition of its financial liabilities. There are many empirical and theoretical studies that have been conducted to clarify the relationship between capital structure and business performance. The pecking order theory asserts that companies have a preference for different types of funding alternatives in a certain order, theoretically. The sequence of funding is determined by the costs associated with these capital sources as well as their accessibility. The Modigliani and Miller hypothesis certifies that in a perfect market, financial performance is not influenced by the capital structure blend of debt and equity. Despite years of research, capital structure decisions still remain a puzzle. The goal of the study was to see how capital structure affected the performance of NSE-listed energy and petroleum companies. The study's population included all five NSE-listed energy and petroleum companies. Capital structure, defined as the ratio of long term debt to long term assets in a particular year, was used as a predictor variable in this study. Liquidity was measured by the current ratio while company size was measured by the total assets natural log per year. Return on assets served as the response variable for financial performance. Secondary data was collected on an annual basis for ten years (January 2011 to December 2020). The research variables were analyzed using a descriptive cross-sectional design. SPSS software was used to conduct the analysis. The results yielded a 0.333 R-square value, indicating that variations in the chosen independent variables account for 33.3 percent of changes in financial performance amongst energy and petroleum firms, whereas other factors accounting for 66.7 percent of variation in financial performance amongst NSE listed energy and petroleum firms. Independent variables had a strong relationship with company performance (R=0.577) 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. Capital structure had a negative as well as statistically significant impact on financial performance while liquidity had a positive and statistically significant impact on the performance of the NSE listed energy and petroleum companies. The size of the company had no bearing on the results of this study. According to the findings of this research, energy and petroleum firms listed on the NSE should concentrate on optimizing their capital structure and liquidity situations since these two aspects have a significant effect on their financial results.