Relationship Between Capital Structure And Performance Of Listed Firms In Nairobi Securities Exchange

ABSTRACT

The bear run experienced in 2016 has provided an opportunity for investors to venture into the securities market, a need exists for the individual organizations to assess their capital structures to assure entrant and existing shareholders of sustainable and economically viable financial returns. The study looked at the connection between capital structure and performance of companies quoted at the securities market in Kenya. To be specific, the study looked to determine the effect of internal financing, equity financing, short term, and long term debts on performance. Two theories informed the research namely trade-off and pecking order theories. A census survey was used where data was collected from all the listed firms that were operational from the year 2009 to 2016. Questionnaires were used to collect data. Descriptive statistics for each study variable were computed, summarized in tables and discussed. Multiple linear regressions were used to determine the significance of each variable to the firm's performance. The results revealed that there exists a significant relationship between equity financing, long term debt financing, internal financing and performance. It was established that the mean equity financing of the quoted firms was fluctuating within the eight years period of examination. Affordable long term debt assists a firm to access productive technologies that it would not have otherwise achieved using internal financing. Debt creates an incentive for the managers to work harder and encourage them to make use of the best investment opportunities.On the other hand, the study could not establish a significant relationship between short term debt financing and performance. It was also found that internal financing and mean for long term debt financing of the firms had increased consistently over the years. The study concludes that a firm that utilizes equity finance excels financially. In addition, affordable long term debt assists a firm to access productive technologies and hence improves its performance. Therefore, equity financing, internal financing and affordable long term debt were recommended as a source of financing. It was proposed that the analysis should be applied to non-listed companies to determine whether contrasting conclusions can be made when relating capital structure to the output of the business.