The Relationship Between Firm Size and Financial Leverage of Firms Listed at Nairobi Securities Exchange

Abstract

The purpose of the study was to establish the relationship between firm size and financial leverage of companies listed at the Nairobi Securities Exchange. Specifically the study sought to establish the effect of firm size, profitability and sales volume on financial leverage of companies listed Nairobi Securities Exchange. Based on the trade off and pecking order theory this study builds a comprehensive framework to answer the research question on whether firm size affects financial leverage of firms listed at Nairobi Securities Nairobi. A census survey was carried out on all the 64 listed companies between 2010 and 2014 in Nairobi Securities Exchange. The financial leverage was measured using debt/equity. The variables were tested using regression analysis and Pearson’s Product Moment Correlation analysis. Descriptive statistics were computed for the listed companies and the main characteristics of the study variables. The findings revealed that the relationship between firm size and financial leverage was statistically significant. There was a significant positive relationship between firm size and financial leverage. The study also confirmed that there is a negative significant relationship between profitability (ROA) and financial leverage. It was also established that there is a negative significant relationship sales volume and financial leverage. The study not only contributes to understanding the link between firm size and financial leverage but at the same time confirms the findings of previous studies that have found a significant link between firm size and financial leverage.