The effect of capital structure on financial performance with firm size as a moderating variable of non financial firms listed at the Nairobi Securities Exchange

Abstract

The purpose of this study was to establish the relationship among capital structure, firm size, and financial performance of firms listed in the Nairobi Securities Exchange. The study first explored the relationship between capital structure and financial performance. The study then explored the moderating variable on this relationship. Capital structure had financial leverage as an indicator. Financial leverage is operationalized by the debt to equity ratio. Financial performance was measured by Tobin's Q. This study is anchored on a positivism research philosophy because it is based on existing theory and it formulates quantitative hypotheses to be tested. Correlational descriptive research design is used to describe the relationships as they exist between specific variables. Secondary data was for the period 2010 to 2017. Data was analyzed using descriptive statistics, multiple and simple regression analyses. The findings indicate a positive statistically significant effect of capital structure on financial performance. Furthermore, firm size (total sales) has a positive moderating effect on the relationship between capital structure and financial performance. Firm managers should seek to grow their firm sizes. This is because larger firms have consistently increased the use of debt in their capital structure. Lenders often perceive larger firms as less risky consumers of credit because of their superior collateral structure. The study, therefore, recommends that firm managers, shareholders, practitioners, the government and other regulators should ensure that they advise and embrace the best firm financing option that helps improve firm financial performance thereby enhancing shareholders value.