Capital Structure, Profitability, Size and Value of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

Capital structure is critical because it determines survival and firm values since it aids in describing how their finances are raised through equity, debt or firms combining equity and debt. The urge to better the values of the firms has led them to massive application of debt. It is argued that debt use is beneficial provided that the acquisition rates are favorable and the monies are well utilized for example in the acquiring of productive assets which are beneficial to the firms. Nevertheless, the linkage between capital structure and value is among unresolved areas in finance and also due to conflicting outcomes from empirical literature. Current research therefore, aimed at assessing the influence of profitability and size on the relationship between capital structure and the value of non- financial firms listed at the NSE. The study was anchored on trade off theory and positivism philosophy. This study utilized panel data of twenty- nine non-financial listed entities. The research relied on secondary data from the published reports which were availed from various websites of the twenty- nine non-financial firms. Collection of data was from 2013 to 2020. Analysis involved descriptive statistics as well as inferential statistics. Descriptive statistics was used in the analysis to aid in deep understanding of the specifics of collected data. Prais Winsten Panel regression was utilized in the inferential analysis. The study confirmed that equity ratio and firm value were positively related and statistically significant (R2 = 0.3590, p<0.05) and the link between debt ratio and value was negative and significant (R2 = 0.3590, p<0.05). The study further found that profitability does not mediate the link between capital structure and value (R2 = 0.0302, p>0.05). On moderation, size does not moderate the link between capital structure and value (R2 = 0.5248, p>0.05). Jointly capital structure, profitability and size influenced firm value (R2 = 0.5461, p<0.05). This study supports the need of ensuring organizations are managed in a manner that ensures risk of excessive debt-taking is minimized. There is need for organizations to evaluate benefits and risks of debt before committing on new debt. This study further supports the need for injecting more money inform of equity instead of relying heavily on borrowed funds. This study is critical in contributing to already existing knowledge in this important area of finance. This was achieved by confirming that, capital structure significantly impacts value of the firms, size does not moderate the relationship between capital structure and value, profitability does not mediate the link between capital structure and value and finally established that jointly capital structure, profitability and size influenced the value of non-financial entities listed at Nairobi Securities Exchange. It is additionally significant to the government and regulators, for example capital markets authority in formulation of various policies which are aimed at providing guidelines and in defining suitable mix for governing debt levels of non-financial firms aimed at financial stability. Additionally, other institutions tasked with policy making can come up with strategies aimed at effective capital structure decisions with the goal of achieving certain firm targets and improving firm values. Investors can be enlightened how capital structure affects firm value; this helps them to make investment decisions that guarantees good return on their investment in the long run. Managers of non-financial entities may use the recommendations of this study in developing best capital structure choices which are aimed at improving the value of their entities. Future studies can focus on the mediating role of corporate governance in the relationship between capital structure and firm value. Further, a study can be done on capital structure, profitability and value of listed firms at East African Securities Exchange.