Effect of Financing Decisions on Performance of Nonfinancial Companies Listed in the Nairobi Securities Exchange, Kenya
Mwangi, Lucy Wamugo
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Corporate failure among companies in Kenya has often been associated with the financing behaviour of the firms. Momentous efforts to revive the ailing and liquidating companies have focused on financial restructuring. Corporate managers, therefore, have the critical responsibility of understanding how alternative financing decisions influence performance so that they can work towards securing successful performance while also mitigating against corporate failure. Suboptimal financing decisions can lead to corporate failure. A great dilemma for management and investors alike is whether there exists an optimal financing policy and how various financing decisions influence business performance. This study therefore investigated the effect of financing decisions on the performance of non-financial companies listed in the Nairobi Securities Exchange (NSE), Kenya, in a bid to offer a solution to this dilemma. The study further sought to establish the interaction effects of the various components of financing decisions on the performance of non-financial companies listed in the NSE. In order to provide a holistic solution, the thesis additionally evaluated the mediating role of internal cash flow available on the relationship between financing decisions and performance. The study employed an explanatory non- experimental research design. A census of 42 non-financial companies listed in the Nairobi Securities Exchange, Kenya was taken. The study used secondary panel data contained in the annual reports and financial statements of listed non-financial companies. The data were extracted from the Nairobi Securities Exchange hand books for the period 2006-2012.The study applied panel data models (random effects) based on the outcome of Hausman specification tests to determine the effect of financing decisions on performance of non-financial companies listed on the NSE, Kenya. The mediating effect of internal cash flow available was tested using the step-wise regression technique by employing the logic of Baron and Kenny (1986). Feasible Generalised Least Square (FGLS) regression results revealed that financial leverage had a statistically insignificant negative association with return on assets (ROA), but a significant negative relationship with return on equity (ROE).Increased aggressiveness in financing policy had a positive effect on both measures of performance while increased aggressive investing policy was found to affect performance positively. Dividend policy had a statistically 'significant positive effect on ROA but an insignificant negative effect on ROE. The study also found that the interaction between the financing decision components had a significant effect on performance. Furthermore, the results of Sobel-Goodman mediation test indicated that internal cash flow available had no mediating effect on the relationship between financing decisions and performance of non-financial companies listed in the NSE. The study recommends that managers of listed non-financial companies should reduce the reliance on long term debt as a source of finance. Further it is recommended that an aggressive financing policy and a conservative investing policy should be employed to enhance the performance of non-financial companies listed in the NSE, Kenya. The government should employ fiscal and monetary policies through the central bank to reduce the cost of borrowing from financial institutions. Most importantly managers should make financing decisions in relation to each other and not in isolation.