The effect of capital structure decisions on financial performance of firms listed under energy and petroleum sector at the Nairobi securities exchange

Abstract

Prudent capital structure is important to firms in an endeavor to promote profitability. Managers have a binding obligation to balance the amount of debt to equity in firms so as to set firms on a sound financial standing. The research objective of this study was to establish the effect of capital structure decisions on the financial performance of firms in the Energy and petroleum sectors listed in the NSE. The study used a descriptive survey design .Energy and petroleum firms listed in the NSE formed the population of this study and was considered as a representative of other firms in Kenya. The study population consisted of five firms listed in the NSE. The whole population of firms listed on the Energy and petroleum sector was considered for the study. This was informed by the fact that the population was small hence there was no need for sampling. Secondary data on capital structure decisions on financial performance of firms listed under energy and petroleum sector at the Nairobi securities exchange was collected for the study period of 2004 to 2014. Data was analyzed using regression analysis. Analyzed data was presented using tables. Confidence interval of 95% was used by the researcher. The findings indicate that the independent variables Debt ratio, Liquidity and firm size had an effect on the financial performance of the firms in the Energy and petroleum sector. Their effect was up to 81%.Debt ratio and firm size had a positive relationship whereas liquidity had a negative relationship to the firms in the Energy and petroleum sector listed in the NSE. Since the study findings on returns of firms in the Energy and petroleum sector listed at the NSE contradicts some of those done by earlier researchers who had established that liquidity does have a significant positive association with financial performance of firms. They also found that commercial banks that are more capital-intensive have lower financial performance. Further studies should be done to establish the cause of such discrepancy.