Effect of Debt Financing on the Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange
Abstract
This study sought to examine the relationship between debt financing and financial performance of listed manufacturing firms in Kenya. Pecking order and tradeoff theory were used to underpin the study findings. Descriptive research design was adopted in this paper. The study targeted 10 manufacturing firms and financial reports between 2017 to 2021 were used as the unit of analysis. iIt iwas determined ithat there was an insignificant relationship between a combination of the independent variables (debt financing, interests tax shield and liquidity) and dependent variable (financial performance) (F (1,34) = 1.678; p =0.204) and they could explain 98.2% variation of financial performance (Adj R2 =0.982). It was further determined that a unit increase in debt financing contributed to 14.9% decrease in financial performance but the relationship was insignificant, since p-value > 0.05 (β=--0.149; t=-0.879; p=0.389). It was further determined that a unit increase in interest tax shield contributed to 11.2% decrease in financial performance but the relationship was insignificant, since p-value > 0.05 (β=--0.112; t=-0.659; p=0.515). It was further determined that a unit increase in liquidity contributed to 43% increase in financial performance and the relationship was statistically significant, since p-value < 0.05 (β=0.430; t= 2.777; p=0.009). It can be concluded ithat ithere iis ia iweak inegative iand iinsignificant irelationship ibetween idebt ifinancing iand ifinancial iperformance. The study recommends that managers of these firms should formulate policies that will improve capital management practices and sustain accounts payable as this will improve ROA. This will make manufacturing firms more attractive to investors. Further regulators such as NSE and CMA and by extension ministry of finance should enforce regulations and rules on debt financing of the listed firms to avoid bankruptcy situations of the listed firms.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1521]
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