CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE FOR FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE
Abstract
This research examined the effect of capital structure on financial performance of firms listed at NSE. To achieve this, the researcher used Debt ratio, Equity ratio and retained earnings as independent variable and Return on Equity as the dependent variable. The research adopted a descriptive research design using census method where the target population comprised of all the firms listed at NSE. The study relied on secondary data obtained from NSE, CMA, CBK, companies published financial statements and other published information. The data collected was for the period from 2016 to 2020. Data analysis and presentation involved computation of ratios, measures of spread and measures of central tendencies which included mean, standard deviation, minimum and maximum. In addition, inferential statistics were utilized with computation of co-efficient of correlation. Regression analysis was used to express the relationship between the independent and dependent variable. The researcher used tables to present the analyzed data for interpretation and explanation. From the analysis results, the study established that debt ratio negatively but significantly affects financial performance of NSE listed firms in Kenya. This was shown by a beta value of -0.186 and sig value of 0.033<0.05. The results bear the implications that increasing the levels of debt ratio with one-unit results to 0.186 unit’s reduction in the levels of financial performances of the NSE listed firms. The results also implied that equity ratio have a positive but insignificant effect on financial performance of NSE listed firms. This is shown by a beta value of 0.098 and sig value of 0.285>0.05. The results implied that increasing equity ratio with one-unit results to an increase of 0.098 units on financial performances of the NSE listed firms. Retained earnings on the other hand positively and significantly affects financial performance of NSE listed firms in Kenya. This is shown by a beta value of 0.365 and sig value of 0.001<0.05. The results implied that increasing retained earnings with one-unit results to an increase of 0.365 units on financial performances of the NSE listed firms. The study recommended the management of the NSE listed firms to enhance their levels of retained earnings as well as equity ratios since the practices bears a positive effect on financial performances.
Key Words: Equity Ratio, Retained Earnings, Return on Equity, Capital Structure
CITATION: Muli, J., & Ibrahim, A. (2023). Capital structure on financial performance for firms listed at the Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 10 (2), 141 –152.
Full Text:
PDFReferences
Abdul, R. Bushra Z & Mustafa (2007) Capital Structure and Profitability: Case of Islamabad Stock Exchange. International Review of Business Research Papers 3(5), 347-361.
Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. The Journal of Risk Finance, 6(5), 438-445.
Asquith, P., & Mullins, D. (1986). Equity issues and offering dilution. Recent Developments in Corporate Finance, 51–82. https://doi.org/10.1017/cbo9780511628610.007.
Bain, R. (1951). Action Research and Group Dynamics. Social Forces, 30(1), 1–10. https://doi.org/10.2307/2571734.
Brealey, R. A., S. C. Myers, and F. Allen (2006). Principles of Corporate Finance, 8th Edition, New York McGraw-Hill Irwin.
Brigham, E. F., & Houston, J. F. (2007) Fundamentals of financial management: Cengage Learning. 2004 or 2007.
Buser, S. A., Chen, A. H., & Kane, E. J. (1981). Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital*. The Journal of Finance, 36(1), 51–60. https://doi.org/10.1111/j.1540-6261.1981.tb03534.
Chakraborty, I., 2010. “Capital structure in an emerging stock market: The case of India”, Research in International Business and Finance, Vol. 24, pp. 295-314.
Chiang, Y.H., Chan, P.C.A., & Hui, C.M.E., (2002). “Capital structure and profitability of the property and construction sectors in Hong Kong”. Journal of Property Investment and Finance, 20(6), pp. 434-454.
Eckbo, B. (1986). Valuation effects of corporate debt offerings. Journal of Financial Economics, 15(1-2), 119–151. https://doi.org/10.1016/0304-405x(86)90052-8.
Gaston Vedasto Mujwahuzi, Crispin John Mbogo. Effects of Capital Structure on Business Profitability of Processing Enterprises Listed on the Dar es Salaam Stock Exchange, Tanzania. Journal of Finance and Accounting. Vol. 8, No. 4, 2020, pp. 165-171. doi: 10.11648/j.jfa.20200804.11.
Gill, A., Biger, N., & Mathur, N. (2011, December). The Effect of Capital Structure on Profitability.
Gleason, A. (2009). The relationship between capital structure and financial performance, Journal of Finance, 12(3), 19-29.
Harris, M., & Raviv, A. (1991). The Theory of Capital Structure, XLVI (1).
Hovakimian, A., Hovakimian, G., & Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues. Journal of Financial Economics, 71(3), 517–540. https://doi.org/10.1016/s0304-405x(03)00181-8.
Jalal, A. M. (2007). The Pecking Order, Information Asymmetry, and Financial Market Efficiency. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.939588.
Jensen, Michael C. and William H. Meckling (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics 3: 305-360.
Jordan, B; Westerfield, R & Ross, S. (2011). Corporate Finance Essentials. McGraw- Hill/Irwin (7th Editionn). New York. https://doi.org/10.1016/S1574-0102(03)01005-7.
Kajananthan, R., & Nimalthasan, P. (2013). Capital structure and its impact on firm performance: A study on Sri Lankan listed manufacturing companies. Merit Research Journal, 1(2), 37–44.
Kebewar, M. (2012). The effect of debt on corporate profitability Evidence from French service sector. Undergraduate. Orleans Cedex.
Kumar, N. S. (2015). Capital structure and its impact on profitability. International Journal of Science, Technology & Management,4(2), 24-30.
Maksimovic, V. (1990). Product Market Imperfections and Loan Commitments. The Journal of Finance, 45(5), 1641–1653. https://doi.org/10.1111/j.1540-6261.1990.tb03733.
Mann, H. M. (1966, August). Seller Concentration, Barriers to Entry and Rates of Return in Thirty Industries, 1950-1960. Review of Economics & Statistics., 48(3), 296-307.
Mishra, A. Wilson, C.& Williams, R. (2009). Factors affecting financial performance of new and beginning farmers. Agricultural Finance Review, 69(2), 160-179.
Modigliani, F., and Miller, M.H., 1963. Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), pp.433-443.
Pandey, I., & Chotigeat, T. (2004). Theories Of Capital Structure: Evidence From An Emerging Market. Studies in Economics and Finance, 22(2), 1–19. https://doi.org/10.1108/eb028777.
Shyam-Sunder, L., & Myers, S. (1994). Testing Static Trade-off Against Pecking Order Models of Capital Structure. https://doi.org/10.3386/w4722.
Stulz, R. (1990). Managerial discretion and optimal financing policies, Journal of Financial Economics, Vol. 26, pp: 145-158.
Vilasuso, J., & Minkler, A. (2001). Agency costs, asset specificity, and the capital structure of the firm. Journal of Economic Behaviour & Organization, 44(1), 55–69. https://doi.org/10.1016/s0167-2681(00)00151-7.
Yegon, C., Cheruiyot, J., Sang, J., & Cheruiyot, P. (2014). The Effects of Capital Structure on Firm's Profitability: Evidence from Kenya's Banking Sector. Research Journal of Finance and Accounting, 152-159.
DOI: http://dx.doi.org/10.61426/sjbcm.v10i2.2593
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.