Public Debt and the Financial Performance of Companies Listed On the Nairobi Securities Exchange
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Date
2024-05
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Kenyatta University
Abstract
The government borrows to fill the budget deficit. Since the government borrows both locally, and
externally, the effects of borrowing may be positive, negative, or zero. For instance, the positive
effects of borrowing include meeting deficits, developing infrastructure, economic development,
and funding unforeseen circumstances. On the other hand, the negative effects include; inflation,
chances of a debt trap, lack of money in the market, and reduction in the firm’s profits as expected
by the investors. Crowding-out effect of the private sector occurs when many investors shy off
from investing in the companies listed on the Nairobi Securities Exchange. Debt crisis result in a
crowding out effect which is expected to affect the consumption levels in the economy which in
turn affects the financial performance of companies. Most previous researchers have not based
their research on the debt crisis effect on the financial performance of Kenyan firms. Additionally,
the previous researchers have not established a consensus in their theoretical and observational
arguments on the effect of public debt on financial performance thus the urge to look further into
the area of study. Therefore, this study aimed at examining the effect of public debt on the
companies listed on the Nairobi Securities Exchange. The second objective of the study was to
ascertain how factors affecting public debt and the financial success of companies listed on the
NSE are related. This study will help in reviewing and adding onto the empirical and theoretical
work done by the previous researchers. Most importantly, the study aimed at bringing a consensus
on the results that other researchers have come up with on the effect of public debt on the financial
performance of companies listed on Nairobi Securities Exchange. The target population for this
study was the companies listed on Nairobi Securities Exchange. The study used secondary time
series data from Central Bank of Kenya, Ministry of Treasury, and Kenya National Bureau of
Statistics. The association between the variables were determined using Ordinary Least Squares
because it is more precise and concise model for regression analysis. Afterwards, diagnostic tests
such as autocorrelation, heteroscedasticity, multicollinearity, and normality tests were conducted
to determine if the assumptions of the Ordinary Least Squares were adhered to. The study found
out that public debt has mild negative effect on the financial health of companies listed on Nairobi
Securities Exchange. Limitations of the study included challenges in accessing data, for instance,
data from Nairobi Securities Exchange has to be bought. Additionally, mid-year and quarterly data
of some variables are not available. Another limitation is that time taken in data collection is quite
long. The recommendations from this study are that government should reduce the dependency on
loans, policy makers can develop, and government can consider borrowing that is sustainable
Description
A Research Project Submitted to the School of Business, Economics, Hospitality, Tourism and Leisure Studies Department of Economic Theory in Partial Fulfilment of the Requirements for the Award of a Degree of Master of Economics at Kenyatta University. May 2024
Supervisor
Samuel Muthoga