Effect of Debt Financing on Shareholder Value Creation of Non-Financial Firms at Nairobi Securities Exchange
Loading...
Date
2019-12
Authors
Kariuki, Grace Muthoni
Jagongo, Ambrose
Muniu, Joseph
Journal Title
Journal ISSN
Volume Title
Publisher
Stratford Peer Reviewed Journals and Book Publishing
Abstract
Debt finance may either be long term or short term; a company may prefer long-term debt
because of the tax deduction on interest payment which is a distinct advantage over equity. The
amount of debt a firm utilizes to fund its activities depends on interest charged on debts,
corporate income taxes rates, withholding taxes, and cost of financial distress and covenant
restrictions in financial agreements. Rational investors expect good long term yield of their
investment. Debt financing play an imperative role in general performance of a company and
shareholder value creation. Shareholder value creation and profit maximizing are among the
primary objectives of a firm. Shareholder value creation focuses more on long term sustainability
of returns and not just profitability. There have been a number of firms facing financial crisis
among them; Mumias Sugar Ltd, Uchumi Supermarkets Ltd and Kenya Airways Ltd. All these
companies are quoted at the Nairobi Securities Exchange. Due to declining performance of these
companies, share prices have been dropping and shareholders do not receive dividends. The aim
of this study was to investigate the effect of debt financing on shareholder value creation of nonfinancial
firms quoted at the Nairobi Securities Exchange for the period 2008-2014. The study
was guided by Modigliani and Miller theory. The study used general and empirical models from
previous studies as a basis for studying specific models which were modified to suit the current
study. The study was guided by the positivism philosophy. The study employed explanatory
design which is non-experimental. Census design was used as the number of non- financial firms
at the time of the study was 40 companies. The data was gathered from NSE handbooks and
CMA publications comprising of annual financial statements, income statements and
accompanying notes. Ordinary Least Square regression analysis was conducted to examine the
effect of debt financing decision on shareholder value creation. The results revealed that debt
financing had a statistically significant positive effect on EVA. The study further analyzed sector
based differences among companies listed at the NSE. The results indicated significant
differences among various sectors in respect to the effects of debt financing on shareholder value
creation. Feasible generalized least squares were used to estimate the model. Diagnostic tests
were conducted to ensure non-violation of the assumptions of Classical Linear Regression
Model. Among the tests conducted; includes panel unit root test and Autocorrelation. Study
model tests showed that, there was non-violation the assumptions and hence the model found fit
for further analysis. The study recommends that managers of quoted non-financial companies
should strive and practice periodic shareholder value creation analysis for continuous assessment
of growth process. The government through the CMA should come up with regulatory
framework that guide firm listed in enacted dividend policies. Further it is recommended that
shareholder value creation report is enforced as an additional statement published by the firms
quoted at the NSE, Kenya.
Description
Research Article
Keywords
Debt, Financing, Shareholder, Value Creation, Non-financial, Firms
Citation
Stratford Peer Reviewed Journals and Book Publishing Journal of Finance & Accounting. Volume 3;5, Pg 53-75. December 2019, Email: info@stratfordjournals.org