Effect of Financial Leverage on Growth of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

Financial leverage not only determines a company's performance and financial benefits but also determines its growth. As companies expand, and due to increased operations and accompanying costs, this requires additional funding. However, leveraged finance is riskier than equity finance because the use of debt involves many costs such as interest costs, and risks, and sometimes- high debt use leads to increased costs of equity finance that can negatively affect growth. At the NSE, debt use to finance capital investment has not always advantageous for listed companies. Although very few NSE-quoted companies have used funds raised via debt to expand their capabilities; several other companies have faced financial difficulties due to their lack of financial options. This study thus sought to determine the effect of financial leverage on the growth of nonfinancial corporations quoted at the NSE. The pecking order theory, the agency theory, the tradeoff theory, and the Modigliani and Miller model guided the study. This study adopted a descriptive survey and the population comprised the 44 listed nonfinancial corporations at the NSE as of 31st December 2023. The study thus undertook a census of the 44 quoted nonfinancial entities at NSE. In this research, secondary data was used and the data was gathered for a 5 years from 2019 to 2023. Descriptive and inferential statistical tools were employed for analysis of data using the STATA analysis software. .Descriptive statistical tools were adopted to summarize, describe, and organize data. Inferential statistics including correlation and panel regression were adopted to establish the variables interrelationships. The results documented that financial leverage negatively and non-statistically affected corporate growth while corporate size had a positive and significant relationship with firm growth. The results also showed that profitability had a positive and significant relationship with firm growth while liquidity had a negative but non-statistically significant linkage with the listed non-financial entities' growth. The study concluded that financial leverage does not have a significant effect on firm growth among the NSE listed non-financial entities. The findings also documented a negative and significant linkage between corporate size and firm growth. The study however recommended that NSE quoted non-financial entities management have to hold optimal debt levels since leverage affects an entity’s structure of funding and thus risk since it affects how effectively the company's owners face irreversible investments.