The Relationship Between Financial Performance and Leverage of Firms Listed at the Nairobi Securities Exchange.

Abstract

This research project undertook to study the relationship between financial performance and leverage of firms listed continuously at the Nairobi Securities Exchange for a six year period between 2006 and 2011. Financial performance data was obtained from the Product and Market Development Department at the Nairobi Securities Exchange. Nominal interest data was obtained from the library at the National Bureau of Statistics. The financial data for the twenty five continuously listed companies was extracted and the relevant parameters for the research model were computed. These parameters were return on equity (ROE), equity multiplier, total assets turnover and logistical total assets. Multiple regression analysis was used to find out the relationship between the independent variable; ROE and all the dependent variables and relationship functions were derived for each company separately. The study found out that financial leverage represented by the equity multiplier affects ROE both positively and negatively with 60% of the companies tested exhibiting a positive relationship and 40% exhibiting a negative relationship. All the other independent variables; total assets turnover, logistical total assets and nominal interest rate exhibited a direct relationship with ROE. It was also established that the relationship with all the variables under review was significant since they recorded p values (Sig.) greater than 0.05 in each of the individual response with the variables. The study as indicated clearly illustrate that Debt can have both positive and negative effects on the value of the firm so that the optimal Debt structure is determined by balancing the agency and other costs of debt as means of alleviating the underinvestment and overinvestment problems as given by the negative responses indicated in the study