Financial Structure and Financial Performance of Selected Firms Listed at Nairobi Securities Exchange, Kenya
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Date
2019
Authors
Gathara, Mwangi Zachary
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
A high number of quoted firms have registered declining financial performance in the recent years resulting to financial difficulties contrary to stakeholders’ expectations and adversely affecting the economic growth of the Kenyan economy. Financial structure choice and its impact on financial performance remains a great dilemma to all stakeholders. This study investigated the effect of financial structure on financial performance of selected firms listed at Nairobi Securities Exchange, Kenya. Specifically, the study investigated the effect of leverage, liquidity and equity on financial performance. In addition, the study evaluated the moderating effect of firm size on the relationship between financial structure and financial performance of selected firms listed at NSE, Kenya. The study adopted positivist philosophy as it focused on objectivity and fits a quantitative study with the objective of testing hypotheses. Explanatory research design was employed in this study due to the nature of the problem and available quantitative data. Multivariate tests using panel data model examined the effects of independent variables on firm’s financial performance. The target population of the study comprised of all 30 firms listed on the NSE, between years 2007 to 2015 drawn from seven selected sectors of the economy which met the selection criteria. A census of the 30 firms was done and data collected for the 30 companies for the period 2007 - 2015. The study utilised secondary panel data contained in the annual reports and financial statements of selected companies. Various diagnostic tests including Auto-correlation test, Normality test, Heteroscedasticity test, Unit root test and Test for pooling were carried out. Breach-Pagan Lagrange multiplier (LM) test was used showing that there were no panel effects (implying that ordinary least square should be used (pooling). Therefore, the data was pooled. The study used descriptive statistics, correlation analysis and panel linear multiple regression analysis. Regression coefficients were used to test for significance using t-statistic at 5% level of significance and conclusions drawn. The coefficient of determination (R2) was used to rank explanatory variables’ contribution to the response variable. The study found that Leverage, Liquidity and Owners Equity had significant positive effect on financial performance of selected companies listed at NSE, Kenya, while firm size had positive and significant moderating effect on the relationship between financial structure and financial performance. The overall moderating effect of firm size on the relationship between financial structure and financial performance increased by 7.7% after incorporating the moderator which explained 91.6% of changes in financial performance compared with 83.9% without the moderator. The study concluded that leverage, liquidity and owners’ equity had positive and significant effect on financial performance and that the use of various components of financial structure jointly enhanced the financial structure’s power to explain the variations in financial performance. The study contributed to the financial structure literature by providing evidence of the effect of Leverage, Owners’ Equity and Liquidity on financial performance of firms listed in NSE, Kenya for the period 2007-2015. The study recommended that managers of the selected firms listed at NSE, Kenya could utilize the various sources of finance since financial structure has a positive effect on the financial performance of the listed firms with leverage making the highest contribution to financial performance.
Description
Thesis Submitted to The School of Business in Partial Fulfilment of The Requirements for The Award of The Degree of Doctor of Philosophy in Business Administration (Finance Option) of Kenyatta University, October 2019
Keywords
Financial Structure, Financial Performance