The influence of capital structure on firms' performance: A case of selected firm's listed in Nairobi securities exchange, Kenya

Abstract

Corporate finance literature suggests that the capital structure decision plays a critical role in determining the performance of a firm. This study investigated the relationship between capital structure and corporate performance of 27 selected companies listed within the Nairobi Securities exchange ( NSE) excluding banks during the period 2001-2010. In this study, the capital structure is considered in terms Debt and Equity. The relationship between capital structure and corporate performance is one that has received considerable attention in the finance literature. This is because it represents one of the most controversial issues in the field of finance. Its in this respect the researcher carried the study in the Kenyan Nairobi Securities Exchange market. The objective of the study was to assess the relationship between debt and firms performance for the selected firms in NSE, to assess the relationship between Equity and firms performance for the selected firms in NSE and to assess the relationship between Age and firms performance for the selected firms the Nairobi Securities exchange. The study used financial ratios such as , Return on Equity (ROE), Return on Assets ( ROA), as measures of firm performance. The study also used debt/equity ratios, profitability, to analyze the relationship between capital structure and firms performance. Secondary data from Nairobi Securities Exchange hand book was collected for the period of 10years ( 2001-2010). It comprised of Audited financial statements, daily share prices including open and closing prices were obtained basically from the NSE for ten years, and outstanding shares, profits, total assets, daily market prices , equity. Data obtained was analyzed into useful information using a statistical package for Social science ( SPSS), MS-excel. Multiple regression analysis was used since it is the best suited for providing a means of establishing quantitative association between variables. The result of the research explains a significantly positive relationship between Equity and ROE and ROA as measures of firm performance, while Debt and firms age has a negative correlation with Return on Equity (ROE ) and Return on Asset (ROA).