The Relationship Between Financial Structure and Financial Performance of Listed Non-financial Firms in Kenya

Abstract

The decision-making process relating to financing structure of a company have a significant importance in corporate governance and accordingly to future success and development. However, despite the various theoretical support for financing structure, the determination of the optimal financing structure for investments and operations remains one of the most insightful and unsolved problem in corporate finance even up to date. In Kenya, the NSE since its formation has reliably provided a diverse, strong and first-class stage for bonds and stocks trading. However, despite their immense contribution to the economy, firms quoted at the NSE continue to face several difficulties such decline in profitability, swelling leverage levels and delisting. Various non-financial sector firms among them Mumias Sugar, Eveready, Kenya Airways and Uchumi reported losses worthy billions of shillings. This study aimed at determining the effect of financial structure on financial performance of quoted non-financial corporations in Kenya. The Modigliani and Miller (1958) theory, the agency theory, the pecking order theory and the tradeoff theory formed the study’s theoretical foundation. The study utilized a descriptive study design and the undertook a census of the 45 non-financial entities as at 31st December 2020. The study used secondary which was retrieved for a period of 5 years from 2016 to 2020. Data was summarized using descriptive statistical tools and the regression model to determine the interrelationships. The study findings documented that financial structure had a negative and significant effect with ROA whereas firm size had a positive and significant association with ROA respectively. Liquidity had a positive and significant relationship with ROA while firm age had a positive and significant link with ROA respectively. The study concluded that financial structure, firm size, liquidity and firm age significantly enhances financial performance of listed nonfinancial firms at the NSE. The study recommended that the management of the listed nonfinancial firms should hold an optimal financial composition and an appropriate capital mix for their firms since high levels of debt increases the level of risks that the firm faces which adversely affect their entities financial performance.