Capital Structure and Profitability of Insurance Firms Listed At Nairobi Securities Exchange, Kenya
Kanda, Ben Yator
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Recent trends indicate a decline in profitability of insurance firms in Kenya mainly attributed to poor investment and financing decisions. According to the Insurance Regulatory Authority of Kenya, the combined industry profit before tax (PBT) declined from 14.1 billion in 2015 to 12.8 billion in 2016 which represented a decline of 9.21 percent. The poor state of profitability does not exempt firms listed in Nairobi Securities Exchange. While capital structure decision has been fronted as one of the determinants of profitability, there is scarcity of empirical evidence on this subject especially with regard to the insurance industry. To thrive, the insurance firms should adopt financing decisions that best places them in a position to compete and survive in the ever changing business environment. Whereas studies have been done on this area, gaps remain unresolved on the need to consider other components of capital of firms in the analysis such as gearing level, the need to replicate the study locally and expand the indicators of equity financing embraced in the analysis. Specifically, the study sought to establish the effect of short term debt ,long term debt, internal equity and external equity capital on profitability of insurance firms listed at Nairobi Securities Exchange, Kenya as well as the moderating role of capital intensity on the relationship between capital structure and profitability of insurance firms listed at Nairobi Securities Exchange, Kenya. The study adopted positivist research philosophy and causal research design. The target population comprised of all the 6 insurance firms listed in Kenyan Securities Exchange over the period 2011 to 2018. The study used secondary data which was collected using a document review guide. Data was analyzed using descriptive analysis, correlation analysis and multiple regression analysis. The study found that long-term debt had a significant effect on profitability (p<0.05), short term debt had a significant effect on profitability (p<0.05), internal equity had a significant effect on profitability (p<0.05), external equity had a significant effect on profitability (p<0.05) and lastly capital intensity did not have moderating effect on the relationship between capital structure and profitability (p>0.05). Hence, capital structure financing sources significantly predicted profitability; however, the joint effect of the capital structure sources had an insignificant effect on profitability of the firms studied. Hence, the study recommended that companies should combine financing sources that contribute positively towards profitability.