Effect of Leverage on Performance of Non-financial Firms Listed at the Nairobi Securities Exchange
Journal of Finance and Accounting
Volume 3, Issue 5, September 2015, Pages: 132-139
Received: Jul. 27, 2015; Accepted: Aug. 6, 2015; Published: Aug. 14, 2015
Views 4125      Downloads 157
Mukaria Henry Kimathi, Faculty of Business Studies, Chuka University, Chuka, Kenya
Mugenda Nebat Galo, Faculty of Business Studies, Chuka University, Chuka, Kenya
Akenga Grace Melissa, Faculty of Business Studies, Chuka University, Chuka, Kenya
Article Tools
Follow on us
Managers strive to maximise shareholder wealth by making rational financing decisions regarding optimal capital structure which would minimise its cost of capital. In attempt to magnify the return to shareholders, managers employ the use of debt. When excessive debt financing is employed by a firm, it increases the cost of financing and the financial risk of the firm leading to decreasing the return on equity as a result of financial distress. Do the various debt equity ratio levels lead to different financial performance when compared for high levered and low levered firm, high growth and low growth firm or large and small firms? A causal research design was used to establish the cause and effect relationship between financial leverage and the financial performance of the firms. The target population was 61listed firms on the Nairobi securities exchange by December 2013.Purposive sampling was used to select 38 non-financial companies. Financial companies were eliminated because the company’s capital structures have specific characteristics affected by industry regulatory requirements. Secondary data was obtained from published financial statements of the sampled companies for the six year period from 2008 to 2013.Ordinary Least Square method was used to establish the cause effect relationship among variables; Hypotheses were tested at 5% significance level using t-statistic. The study found that there was no significant difference in financial performance between highly levered and lowly levered firms and that there existed a negative relationship between Leverage and firm’s performance. There were also no significant differences in financial performance between high growth levered firms and low growth levered firms and that there existed a negative relationship between a firm’s growth opportunity and financial leverage ratio. There was no significant difference in financial performance between large levered firms and small levered firms. The findings of this study may act as a policy guideline to finance managers involved in managing firms on the contribution of financial leverage and its association with return on equity to maximise shareholder wealth
Leverage, Performance, Growth Firms, Levered Firms, Large Firms, Liquidity
To cite this article
Mukaria Henry Kimathi, Mugenda Nebat Galo, Akenga Grace Melissa, Effect of Leverage on Performance of Non-financial Firms Listed at the Nairobi Securities Exchange, Journal of Finance and Accounting. Vol. 3, No. 5, 2015, pp. 132-139. doi: 10.11648/j.jfa.20150305.14
Abbasali P & Esfandiar M (2012). The Relationship between Capital Structure and Firm Performance Evaluation Measures: Evidence from the Tehran Stock Exchange, International Journal of Business and Commerce Vol. 1, No. 9 ,166-181
Abor,J. (2005). “The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana”, Journal of Risk Finance, 6, pp. 438-47
Aburub, N. (2012). Capital Structure and Firm Performance: Evidence from Palestine Stock Exchange. Journal of Money, Investment and Banking, 23, 109-117.
Amara and Bilal Aziz, (2014). Impact of Capital Structure on Firm Performance: Analysis of Food Sector Listed on Karachi Stock Exchange, International Journal of Multidisciplinary Consortium, Volume - 1 | Issue – 1
Baker, M. and J. Wurgler, (2002). Market Timing and Capital Structure, Journal of Finance 57, 1-32
Boudry, W, Kallberg, J & Liu, C (2010). ‘An analysis of REIT security issuance decisions’, Real Estate Economic, vol. 38, no. 1, pp. 91–120.
Cooper, R.D. and Schindler, S.P (2003). Business Research Methods, McGrawHill-Irwin
Ebaid, I. E. (2009). The impact of capital-structure choice on firm performance: empirical evidence from Egypt, The Journal of Risk Finance, Vol. 10 No. 5, pp. 477-487
Graham, J.R. and C. Harvey. (2001). The Theory and Practice of Corporate Finance: Evidence from the Field," Journal of Financial Economics 60, 187-243.
Gitman, L. J. (2009). Principles of managerial finance. 12th edition. Addison Wesley Prentice Hall
Imad Z.R. (2013). Debt-Performance Relation. Evidence from Jordan International Journal of Academic Research in Accounting, Finance and Management Sciences, Vol. 3 (1), pp. 323–331
Jensen, M.C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Review 76, 323-329.
Jensen, M. C. & Meckling, W. H. (1976). The theory of the firm: managerial behaviour, agency costs and ownership structure, Journal of Financial Economics, vol. 3, no. 4, pp. 305-360.
Khan, Abdul Ghafoor (2012). The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan, International Journal of Accounting and Financial Reporting, Vol. 2, No. 1, pp. 245-262.
Kraus, A. & Litzenberger, R. H. (1973). A State-Preference Model of Optimal Financial Leverage , Journal of Finance, vol. 28, no. 4, pp. 911-922.
Majumdar, S. K., & Chhibber, P. (1999). Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance.
Modigliani, F. and M.H. Miller (1958). The Cost of Capital, Corporate Finance and the Theory of Investment. The American Economic Review, Vol.48, No.3, June 1958.
Modigliani, F. and Miller, M. (1963).Corporate Income Taxes and the Cost of Capital: a Correction, the American Economic Review, 53: 443-53.
Muritala, T. A. (2012). An Empirical Analysis of Capital Structure on Firms Performance in Nigeria, International Journal of Advances in Management and Economics. 1 116-124.
Murray Z. Frank and Vidhan K. Goyal (2007). Capital Structure Decisions: Which Factors are Reliably Important? Financial Management, Vol. 38, No. 1 (spring, 2009), pp. 1-37
Mwangi, L.M, Makau, M.S & Kosimbei, G (2014). The relationship between Capital Structure and Performance of Non-Financial Companies Listed in the Nairobi Securities Exchange, Kenya”. Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, Vol: 1 Issue 2.
Myers, S. C. (1984). The capital structure puzzle: Journal of Finance, 39, 575- 592
Onaolapo, A.A., & Kajola, S.O. (2010). Capital Structure and Firm Performance: Evidence from Nigeria. European Journal of Economics, Finance and Administrative Sciences, 25, 70-82.
Pandey, I. (2005). Financial Management. New Delhi: Vikas Publishing House
Rajan, R.G., & Zingales, L. (1995). What do We Know about Capital Structure? The Journal of Finance, 50(5), 1421-1460.
Saeedi,A and Mahmoodi, (2011).Capital Structure and Firm Performance: Evidence from Iranian Companies, International Research Journal of Finance and Economics, issue70
Sogorb, F. (2005). How SME Uniqueness Affects Capital Structure: Evidence a 1994-1998 Spanish data panel. Small business economics, 25(5), 447-457
Zeitun, R and Tian, G. (2007).Capital structure and corporate performance: evidence from Jordan. The Australasian Accounting Business & Finance Journal, 1(4), 40-61.
Zuraidah Ahmad, Norhasniza Mohd Hasan Abdullah, and Shashazrina Roslan (2012). Capital Structure Effect on Firms Performance: Focusing on Consumers and Industrials Sectors on Malaysian Firms. International Review of Business Research Papers Vol. 8. No.5. pp. 137 – 155.
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
Tel: (001)347-983-5186