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

Abstract

Financing decision is one of the fundamental functions of corporate decision-making. It is ranked under much more preference to other functions that help financial managers on deciding where, how and when to obtain finances to meet investment needs of the firm. Financial leverage and financial performance are fundamental issues in corporate finance. As per the pecking order theory, an optimal structure of capital is derived a tough balancing of the costs that are related to debt financing and tax advantage benefit for use of debt finance. The study objectives was to evaluate the effect of financial leverage on financial performance of non-financial firms listed at the Nairobi Securities Exchange. This study used a quantitative research design. The population of the study was made up of the 48 non-financial firm listed at NSE. The study employed secondary data that was obtained from the annual audited financial statements, which had audited and published by the non-financial companies listed at NSE for for a period of 5 years between 2011 and 2015. This study employed a correlation analysis and a multiple linear regression method in analyzing the collected data. The study found that financial leverage had a significant negative relationship with financial performance while firm size had positive and insignificant relationship with financial performance and liquidity had a significant positive relationship with financial performance of non financial firms listed at the NSE. This study concluded that financial leverage has an adverse effect on financial performance whereas the size of the firm improves the financial performance and liquidity improves (increases) financial performance of the listed non-financial firms. The study recommended that management of the non financial firms listed at the NSE should employ minimal debt level or use an optimal debt level and focus on growing their firms to ensure that they enjoy the economies of scale associated with large firms, also to attract good management thus to improve their financial performance.