Capital Structure and Financial Performance of Listed Companies at the Nairobi Securities Exchange Market: a Case of Commercial Banks in Kenya

Abstract

The main goal of every commercial bank is to operate profitably to maintain stability and sustainable growth. Capital structuring is viewed as critical drivers for financial performance of the banking institution. An appropriate capital structure is a critical decision for any business organization to be taken by business organization for maximization of shareholders wealth and sustained growth. The purpose of this study was to examine how capital structure influences financial performance of NSE listed firms in Kenya. The major focus of this study was to investigate firms’ specific factors such as working average cost of capital, firm leverage, cash flow, and control and their effects on financial performance of NSE listed banks in Kenya. The researcher adopted descriptive research design to achieve this aim. The study targeted eleven banks listed at the NSE and they were included in the sampling frame if they had a five-year financial report. Document review was used for collecting secondary data from 2011-2015 annual reports. Descriptive statistics (mean and standard deviation) and multiple regression analysis and statistical package for social scientists (SPSS) computer software (version 20) was used to analyse data of the banks specific factors and financial performance, measures return on asset (ROA) of the firms over a period of five years. The study findings ascertained that increasing unit levels of cost of capital, financial leverage, cash flow, and control have positive effect on the financial performance of firms listed at the Nairobi Securities Exchange, Nairobi. This study, therefore, recommends that commercial banks listed at the Nairobi Securities Exchange need to reassess their capital structuring so that they can realise better financial performance. This study provides a basis for enhancing a strong capital structure. The findings of this study may guide building strong capital structure, specifically on cost of capital, financial leverage, cash flow, and control. In lieu of these determinants of capital structure, this study offers a basis to improving financial performance.