Financial Leverage and Performance of Insurance Firms Listed at the Nairobi Securities Exchange, Kenya
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Date
2023
Authors
Nduru, Mummylace
Journal Title
Journal ISSN
Volume Title
Publisher
kenyatta university
Abstract
Financial leverage has long been linked with financial performance of insurance industry;
however empirical evidence remains unclear on the nature of such relationship. The
connection between financial leverage and financial performance has remained unclear.
Insurance industry plays a critical role in development of economy in mitigation of risk;
however, financial performance has remained a challenge among listed insurance firms in
Kenya. For instance, financial performance of the listed insurance firms has been
fluctuating across the 5 year period. It is against this background that the research project
intended to establish the relationship between financial leverage and financial
performance of insurance firms listed on the Nairobi Securities Exchange, Kenya. More
the specific objectives of the study was; to establish relationship between short term
debts, and financial performance of insurance firms listed on the Nairobi Securities
Exchange, Kenya, to establish relationship between long term debts and financial
performance of insurance firms listed on the Nairobi Securities Exchange, Kenya, to
establish relationship between debt-equity financing and financial performance of
insurance firms listed on the Nairobi Securities Exchange, Kenya and to establish
relationship between interest coverage and financial performance of insurance firms
listed on the Nairobi Securities Exchange, Kenya. The study was guided by pecking order
theory, trade off theory and the agency theory. The research used descriptive survey
design. The target population was the 6 insurance companies listed on the Nairobi
Securities exchange. A census of all the 6 listed insurance companies was used.
Secondary data from financial reports as published in the Nairobi Securities Exchange
handbook and Kenya National Bureau of Statistics for the period between 2017 and 2021.
Various diagnostic tests were carried out including; Normality, Multicollinearity,
Heteroskedasticity. Panel regressions analysis and Pearson’s product moment correlation
analysis were used for inferential analysis while means and standard deviations were
utilized for purposes of descriptive analysis. The findings were that while short term debt,
long term and debt equity financing all negative and significant regression beta
coefficients, the one for interest coverage was positive but insignificant. The study
concluded that financial leverage is a significant predictor of financial performance. The
study recommended that finance managers of the listed insurance firms in Kenya should
establish optimal debt-equity mix that maximizes the financial performance of their
firms. The marketing managers as part of the senior management team should develop
and implement relevant revenue generating strategies to improve the earnings of the
listed insurance firms in order for them to to meet their debt obligations without hurting
the financial position. The investors and shareholders through the board of directors of
the listed insurance firms in Kenya should be more active and demand for prudent
utilization of the short and long term debts by the management. The policy makers at
Insurance Regulatory Authority should develop policies and regulations that can guide
debt management among insurance firms.
Description
A Research Project Submitted in the School of Business,
Economics and Tourism in Partial Fulfilment of the
Requirements for the Award of Masters of Business
Adminstration (Finance) of Kenyatta University
Keywords
Insurance Firms, Nairobi Securities Exchange, Kenya