Financial Leverage and Performance of Agricultural Firms Listed at Nairobi Securities Exchange, Kenya
Muturi, Wanjiru Judy
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The financing decision of agricultural companies is important since it affects the value of the firm, hence an optimal capital structure should be used in order to maximize its value. Past studies have found mixed results which cannot be generalised regarding the relationship between leverage and performance. The main objective of this study was to investigate the effect of financial leverage on financial performance of the agricultural firms listed at the Nairobi Securities Exchange (NSE), Kenya for the periods 1 January 2011 to 31 December 2015. The descriptive and analytical design were adopted for the study. The target population was all the seven agricultural firms listed at the Nairobi securities Exchange. The data was extracted from secondary sources. The secondary data was collected from publications of Nairobi securities exchange and Capital Markets Authority and the annual financial reports of the agricultural firms and analysed with the ordinary least square multiple regression technique to investigate for the effects of financial leverage ratios on performance ratios. Models were formulated for each hypothesis and tested using the R square, adjusted R square and calculated f figures. The study found that debt level, long-term debt level and debt-equity level all had a positive insignificant effect on ROA. This was true even when the relationship was controlled for the size of the firm and the firm effects in the model. There was no evidence that higher leveraged agricultural firms performed better or worse than the lower leveraged agricultural firms. The study established that there was an insignificant positive relationship between financial leverage and financial performance of agricultural companies listed at the Nairobi Securities Exchange, Kenya. The study recommends that the management of agricultural firms in Kenya should employ the best mix of capital when financing in order to improve on its profitability.