Effect of Capital Structure on Financial Performance of Commercial Services Firms Listed at Nairobi Securities Exchange

Abstract

Capital structure6plays key role in the financial6performances of firms. In the last6ten years, listed commercial and services firms in Kenya have shown poor financial performance with a dwindling capital structure. This study sought to determine6the effect of6capital structure on6financial performance of commercial6services firms6listed at Nairobi6Securities6Exchange. To address the objective the study adopted capital structure, measured by debt-equity ratio, as the independent variable with financial performance (return on assets) as the dependent. Firm size and age were adopted as the control variables. The study was anchored on tradeoff theory and supported by pecking order theory and Modigliani & Miller theory. The study employed an explanatory research design on thirteen (13) firms under6. commercial services listed6. at the NSE6. as6. at December 2022. This6. study. used secondary6. data collected from Nairobi Securities exchangel reports using a data6. collection sheet. The study was based on the period between the year 2013 and 2022. The data was analysed using descriptive6. and inferential statistics. From3descriptive statistics, between 2013 and 2022, the listed Kenyan commercial and service firms had an average financial performance as measured by ROE of -26.086%; average capital structure (Debt-equity ratio) of 22.299%; mean log of assets of 21.918; and average firm age of 51.71 years. From the correlation analysis, capital structure (debt-equity ratio) showed a significant negative relationship with financial performance. However, firm size showed a positive but insignificant relationship while firm age had a negative and insignificant relationship with financial performance. From the fitted regression model, debt to equity ratio (capital structure) had negative effect on financial performance. On the other hand, firm size and firm age had insignificant effect on financial performance. The study concluded that capital structure has a negative effect on financial performance of the listed commercial and service firms in Kenya. The study also concludes that firm size and age have no significant effect on financial performance of the listed commercial and service firms in Kenya. The study recommends an increase in the equity financing and reduction in the debt levels as well as an optimal increase in the assets among the listed commercial and service firms in Kenya. Future studies based on other predictors of financial performance, other firms, different measures of variables, different periods and semi-annual or quarterly data were recommended.