Analysis of firm size, leverage and financial performance of Non- financial firms in Nairobi securities exchange, Kenya

Abstract

ABSTRACT Non-financial firms listed in the Nairobi Securities Exchange (NSE) have faced numerous challenges ranging from declining after tax profits, delisting or suspension at 21.3% between 2012 and 2018. This indicates that financial leverage also remains a challenge. Further, studies reviewed on leverage-performance and firm size-performance relationships posted mixed results. While the reported studies have been conducted elsewhere, no known study has attempted to integrate the three variables: financial leverage, firm size and financial performance. Therefore, the purpose of this study was to analyze firm size, financial leverage and financial performance of non-financial firms listed in NSE, Kenya. Specifically, the study sought to establish the effect of financial leverage on financial performance; determine the influence of firm size on financial performance and assess the moderating effect of firm size on the relationship between financial leverage and financial performance of listed non-financial firms in the NSE. The study was anchored on Economies of scale, trade-off, Signaling and Net operating income theories. The study used a correlation research design. The target population was 47 non-financial firms listed at the NSE between 2012 and 2018 where 28 firms were purposively sampled and pooled for 7 years to obtain 196 firm year observations. Secondary data was obtained from audited financial reports using data collection sheets. The data was analyzed using fixed effects panel regression. Results show that financial leverage is a significant positive predictor of performance (ROE), β = 0.141 (p = 0.043) and Tobin’s Q, β = 0.022 (p = 0.007). This means that a unit change in financial leverage leads to a significant increase in ROE and Tobin’s Q of 0.141 and 0.022, respectively. Firm size is a significant positive predictor of performance (ROE), β = 0.097 (p = 0.020) and Tobin’s Q, β = 0.058 (p = 0.0001) meaning that a unit change in firm size leads to a significant increase in ROE and Tobin’s Q of 0.097 and 0.058, respectively. Model coefficient interaction term was negative but significant for (ROE) β = -0.083 (p = 0.001) and Tobin’s Q, β = -0.037 (p = 0.001) which implies that firm size negatively moderates the relationship between financial leverage and performance. The study concludes that financial leverage and firm size significantly affect firm performance positively and firm size moderates the relationship between financial leverage and performance. The study recommends that the management should enhance financial leverage and sales; and managers should always consider the size of the firm in making leverage choice decisions. Findings may be useful to academia as a basis of further research in finance.