The Impact of Capital Structure on Firm Performance: an Empirical Study of Non-financial Firms Listed in the Nairobi Securities Exchange

Abstract

If used properly, a company's capital structure may have a significant impact on its success. Corporations have no hard and fast rules to follow when deciding whether to issue debt, equity, or hybrid instruments. NSE-listed non-financial companies' capital structures include equity financing, debt financing, and internal financing. The purpose of this research was to evaluate whether or not the capital structure of non-financial firms that are listed on the NSE had an influence on the firm performance of such companies. This study was guided by trade off theory, capital structure irrelevance theory and pecking order theory. This study employed both a descriptive and a historical research design in analyzing how capital structure affects firm performance. The 46 non-financial enterprises listed on the NSE made up the sample population. From 2017 through 2021, the study collected information on these businesses to create a 230-observation panel dataset. The study adopted the use of secondary data. To model the association between the capital structure of a firm and its performance, this research used panel data estimation models to investigate the firm performance as measured by ROA across the panel of 46 companies quoted in the NSE from 2017 to 2021. The study employed E-Views statistical software for data analysis. Capital structure is shown to have an effect on the performance of non-financial enterprises listed on the Nairobi Securities Exchange (NSE), Kenya. Growth in the size of non-financial companies listed on NSE was confirmed to have a positive effect on such companies' financial performance. In addition, asset tangibility had a beneficial influence on the performance of non-financial enterprises listed on the NSE, suggesting that it strengthens the performance of such firms. Capital structure was shown to be positively associated with company performance for NSE-listed non-financial companies, and the research also found that firm size and liquidity acted as major control factors in this connection. The research concludes that the advantages of taking out loans to develop the business operations of non-financial enterprises listed at NSE, Kenya exceed the expenses, and so the management team of these organizations should feel comfortable taking out such loans.