The effect of leverage on share prices at the Nairobi Securities Exchange

Abstract

A diversity of views exists as to whether debt affects the value of the firm. The traditional point of view is that debt adds value to a firm until the optimal point is reached. The value of the levered firm will be the sum of the value of the unlevered firm and the gain from leverage. This study employed descriptive research design. The target population was the 47 firms listed at the Nairobi Securities Exchange. The sample was made up of 20 companies that had been consistently been quoted from 2006 to 2010 at the Nairobi securities exchange. The study was facilitated by use of secondary data which was extracted from published reports of quoted companies i.e. financial statements. Simple linear regression analysis and correlation analysis was used to determine the relationship and also to determine other factors apart from leverage which influence share price. From the study, the researcher concluded that leverage had an effect on share price. The study also concluded that there was a general increase in share prices from year 2006 to year 2010. The researcher also concluded that for the firm to experience an increase in share price they must be an increase in dividends. The findings of the study were that there is a significant relationship between debt and the value of the firm based on the P-value and the correlation coefficient. The recommendation based on the findings of the study was that a firm should not employee more than 67% long term debt in its capital structure