Effect of financial leverage on corporate investment of non financial firms listed at the Nairobi securities exchange

Abstract

The relationship between financing and investment is the central issue in the study of corporate finance. Capital structure choices are tough choices because higher leverage may lead to risk of bankruptcy. Financial leverage may also increase shareholder’s return on investment and often there is tax advantages associated with borrowing. The objective of the study was to establish the effect of financial leverage on corporate investment of non-financial firms listed at the Nairobi Securities Exchange during the period 2009 to 2013. A causal research design was adopted for the study. Population consisted of sixty two companies out of which 37 companies were sampled. The sample excluded 17 companies listed under banks and insurance because these companies are regulated and has to meet certain liquidity ratios. Eight companies did not have complete financials for the period under consideration and therefore were also excluded. This study made use of secondary data which was obtained from the NSE library, CMA and in some instances from firm’s annual reports, most of which are publicly available. The research used quantitative techniques in analysing the data using Statistical Package for Social Science (SPSS) version 21.0. The study found out that financial leverage has a significant negative effect on corporate performance, and has a significant positive effect on firm value. The study further concluded that net sales, return on investment, liquidity of firm affect the firm’s investment decision. The study recommends that efforts should be made by management to improve the performance of the company such as to carry out a policy to maximize the use of debt in capital spending activity, and the efforts to be made by management to increase the value of the company through the funding policy, the provision of incentives to managers in the form of bonus shares, and improve company performance.