Financial Leverage and Market Capitalisation of Insurance Companies Listed at the Nairobi Securities Exchange, Kenya
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Date
2025-10
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Kenyatta University
Abstract
The insurance industry is crucial to national prosperity, contributing 6% to Kenya's Gross Domestic Product, according to the Kenya Bureau of Statistics. It serves a crucial function in mitigating economic risks. However, listed insurance companies have experienced fluctuating market capitalization over a five-year period, with the highest recorded at 99.3 billion in 2019 and the lowest at 56.9 billion in 2023. Questions regarding the effect of financial leverage on firm valuation remain unresolved, with existing research offering conflicting conclusions. In response, this study aimed to ascertain the effect of financial leverage on market capitalization of insurance firms listed on the Nairobi Securities Exchange, focusing on short-term debts, long-term debts, debt-equity financing, and interest coverage. The research drew upon the pecking order theory, trade-off theory, Modigliani-Miller (MM) theory, and shareholders value theory. The research employed a descriptive survey approach, conducting a census of all registered insurance firms and leveraging secondary data from financial statements available in the Nairobi Securities Exchange Manual and the Kenya National Bureau of Statistics from 2019 to 2023. Quantitative data were analyzed utilizing Statistical Package for Social Sciences version 28 through descriptive statistics (mean, percentages, standard deviation, frequency distribution) and inferential statistics (linear regression and Pearson correlation). Diagnostic tests including normality, multicollinearity, autocorrelation, heteroscedasticity, and linearity were conducted to validate the assumptions of regression analysis. Feasible General Least Squares regression results demonstrated that short-term debt (p=0.044, <0.05), long-term debt (p=0.012, <0.05), and debt-equity ratio (p=0.0000, <0.05) had a statistically significant positive impact on market capitalization. Conversely, interest coverage exhibited a statistically significant negative effect (p=0.034, <0.05) on market capitalization. Correlation analysis revealed a weak positive correlation between short-term debt and debt-equity ratio with market capitalization, a strong positive correlation for long-term debt, and a strong negative correlation for interest coverage. The study concluded that increases in short-term debt, long-term debt, and debt-equity ratio tend to enhance market capitalization, whereas higher interest rates typically diminish it. Consequently, the study recommends that companies consider increasing their long-term debt, short-term debt, and debt-equity ratio, while striving to reduce interest rates.
Description
A Research Project Submitted to the School of Business, Economics, and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance Option) of Kenyatta University, October 2025.
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1.