Relationship between capital structure and performance of non financial firms listed at the Nairobi securities exchange

Abstract

The choice between debt and equity financing has been directed to seek the optimal capital structure. Several studies show that a firm with high leverage tends to have an optimal capital structure and therefore it leads it to produce good performance, while the Modigliani-Miller theorem proves that it has no effect on the value of firm. The importance of these issues has only motivated researchers to examine the relationship between capital structure and firms financial performance. The objective of this study was to establish the relationship between capital structure and financial performance of non-financial firms listed at the Nairobi securities exchange in Kenya between the period January 2008 to December 2013.Financial performance was measured by return on equity while capital structure was measured by debt ratio. Other control independent variables: Tangibility of assets, size of the firm and the growth of the firm. It is important to note that during this period Kenya experienced political anxiety, leading to uncertainty in the securities market. This presents an interesting period of study considering the ups and downs of the trade cycle in the securities market. The beginning of this period also experienced the global financial crisis which was witnessed in the period around 2008-2009.The population of study consisted of all the 40 nonfinancial firms listed and duly registered with capital market authority of Kenya. Secondary data used was obtained mainly from the annual audited and published books of accounts, financial statements and the NSE. Data analysis was done by use of regression analysis model with the help of a computer that was used to analyze regression statistics, Analysis of Variances and coefficients or gradients of variables and the constant. From the study, there exists a linear significant positive relationship between financial performance of the firm and debt ratio. Also, there is a positive insignificant relationship between financial performance and tangible assets. However, the results show that there exists a linear insignificant negative relationship between financial performance of the firm and size and growth of the firm.