The relationship between gearing and value of firms listed at the Nairobi stock exchange

Abstract

The objective of this study was to investigate whether there exists a relationship between gearing and value of firms listed on the NSE. Gearing is an expression of the relationship between the amount of finance provided by lenders and the owners’ equity. The research design was a causal design and the population of the study consisted of all the 57 firms currently listed at the Nairobi Stock Exchange. The sample consisted of 38 non financial firms which were listed between the years 20012010, secondary data for the period was collected from NSE data bank. Purposive sampling of companies quoted on the NSE during the period 2001-2010 was carried out with exclusion of financial firms. Further, those firms which were listed in the course of the study period and those which were suspended for whichever reason were also not included in the sample. Gearing was the independent variable and was computed as a percentage being the sum of preference share capital and long term debt to total equity multiplied by one hundred percent. Value of firm was the dependent variable. Simple regression model was used for the purpose of analysis to determine the nature of the relationship. For all the ten years of the study period, the T-tests were below o.5 which was insignificant and the R2 also were below 0.5 indicating that major variations of value were explained by other variables other than gearing. It was concluded that there is a non-linear relationship between gearing and the value of listed firms at the Nairobi Stock Exchange. However, it is recommended that a study of similar nature to be carried out for different market segments independently using different methodology to see how value of firms in different segments reacts to gearing variation.