The relationship between financial leverage and asset growth of firms listed at the Nairobi Securities Exchange

Abstract

The objective of the study was to establish the relationship between financial leverage and asset growth of firms listed at the Nairobi Securities Exchange for the period 2009 to 2013.The study examined the theories of capital structure, determinants of asset growth and reviewed empirical studies relevant to the study objective and is of value to investors and managers in achieving in-depth understanding on the relationship between financial leverage and the growth of firms listed at the NSE .The study adopted a descriptive research design which seeks to define the relationship between two or more variables. The population of the study consisted of sixty two firms listed at the Nairobi Securities Exchange out of which thirty six companies were sampled. The sample excluded twenty companies listed under the banks, insurance and investment segments because of the key fact that these companies are regulated and are required to adhere to certain minimum liquidity and leverage ratios. Another six companies were excluded from the study; two companies were newly listed and therefore were not continuously listed over the period of study while another four companies had missing information for some years required for the computation of the dependant and independent variables. Secondary data was used in the study and this was collected from the thirty six companies sampled. The sources of data included the Nairobi Securities Exchange database and Annual Audited Financial Statements of the sampled companies. This data was analyzed using Statistical Packages for Social Sciences (SPSS) version 22 and the results of the regression and correlation analysis indicated an R-squared value of 0.299 revealing that 29.9% of the variation in asset growth was explained by financial leverage, return on equity, size and age of the firm at 95% confidence interval. The regression analysis results further indicate a positive but insignificant relationship between financial leverage and asset growth of firms listed in the NSE. The financial leverage coefficient of +0.002 in the established regression model indicates the positive relationship between the two variables. The reported p-value of 0.998 is more than the critical value of 0.05 hence demonstrating the insignificance of the relationship between financial leverage and asset growth. These findings can possibly be explained by the indirect relationship between financial leverage and asset growth and as such there are other factors that have a direct relationship with asset growth of firms. The study made a policy recommendation that the management and investors of the firms listed in the NSE should further examine other variables such as Return on Equity and Size of the firm that notably have a more significant impact on a firms’ asset growth and concentrate on the same to achieve higher asset growth rates and financial strength. The study further recommended that an optimum capital structure that will support company growth should be sought by managers of firms since excessive borrowing can lead to financial distress and bankruptcy and hence limit growth. The study also recommended that investors be guided by the findings of this study towards focusing on variables such as return on equity and size of the firm that have a more significant impact on capital gains and investment growth.