The relationship between capital structure and financial performance of insurance companies in Kenya

Abstract

Capital structure is a significant factor in corporate financial management and has a direct impact on financial performance of a firm. The financial decision plays an important role to finance managers who strive to maintain a capital structure that maximizes the shareholders wealth while minimizing the financial and business risk. The objective of this study was to determine the relationship between capital structure and financial performance of the insurance companies in Kenya. The multiple regression technique was used with return on assets as the dependent variable and financial leverage, log of total assets, growth, age of an insurance company (years since establishment), log of tangible asset and inflation as independent variables. The study analysed secondary data from 36 insurance companies for 5 years, from 2008 to 2012. The correlation coefficients and coefficient of determination were used to test whether the expected values of the quantitative variable within the predefined variable differed from each other. From the findings, the value of adjusted R2 is 0.1859, an indication that there was variation of 18.59% on financial performance of insurance companies due to changes in the independent variables. The study also found out that financial leverage would impact the performance of a firm by a significant factor of 17.6% and 21.8% by its size. Age of a firm had weak positive effect of 0.6%. Further a negative relationship was observed between financial performance and growth, increased growth lead to a decrease in return on assets by an insignificant factor of 0.010. The research findings are useful to the finance managers who need to maintain an optimal capital structure, to the investors while choosing profitable insurance companies to make investment decision, to the policy holders on selecting insurance companies for risk management in addition the insurance industry regulator for the purpose of regulating the insurance industry