The effect of capital expenditure on financial performance of firms listed at the Nairobi securities exchange

Abstract

Organisations worldwide require investment in capital expenditure in order for them to achieve their business objectives and maximize shareholders wealth. It is therefore expected that investment in capital expenditure should be followed by an increase in the financial performance of an entity. The study sought to establish the effect of capital expenditure on financial performance of organisations listed at the Nairobi Securities Exchange (NSE). A census study comprising of a total of 53 companies that were listed at the NSE during the period 2009 to 2013 was conducted by way of a desk review of published company annual financial statements. The linear regression model was used to establish the relationship between capital expenditure and financial performance. In recognition that capital expenditure is not solely responsible for financial performance, degree of leverage and firm size were introduced into the model. Findings of the study indicate that all three factors, capital expenditure, leverage and firm size influence financial performance positively. These factors account for a substantial 69.5% of firm financial performance of companies listed at the NSE as represented by a coefficient of multiple regression of 0.695. Further findings indicate an intercept of 0.723 for all five years under study. The study concludes that capital expenditure, leverage and size of the firm positively and significantly affect financial performance. This conclusion underpins the importance of senior management understanding the impact of capital expenditure strategies on a firm’s ability to maximize shareholders wealth.