Effect of Financial Leverage and Ownership Concentration on Performance of Firms Listed at The Nairobi Securities Exchange, Kenya

Abstract

Financial leverage literature shows plausible but mixed relationships between leverage and performance. Prior studies show mixed relationships between ownership concentration and performance. Ownership concentration and financial leverage have not been studied. Although, Nairobi Securities Exchange (NSE) enables firms in Kenya to raise long-term funds, the effect of financial leverage on performance of listed firms, effect of ownership concentration on firm performance, and the association between ownership concentration and financial leverage for firms listed at the NSE, are not known. The main purpose assesses effect of financial leverage and ownership concentration on performance of firms listed at the NSE, Kenya. Specific objectives are to: establish the effect of financial leverage on performance; determine the effect of ownership concentration on performance and establish the association between ownership concentration and financial leverage. A conceptual framework, with financial leverage and ownership concentration as independent variables, firm performance as the dependent variable and firm size, age, asset tangibility, management efficiency and profitability as control variables is adopted. A causal research design is employed. The target population (N = 47) companies listed for the period: 2007-2011 resulting to a panel of 235 firm year observations. Secondary data is collected using data collection sheet. Unit root test results indicate: all the variables are integrated of order zero (p = .000). Panel models show a good fit with adjusted R squared of above 77.32 %. Results show financial leverage is a significant negative predictor of performance (ROA), ~ = - .0438 (p = .0350) and Tobin's Q, ~ = -.5144 (p = .0124) meaning a unit change in financial leverage leads to a significant decrease in ROA and Tobin's Q of .0438 and 0.5144, respectively. Ownership concentration, ~ = -.0057 (p = .0353) is significant predictor of performance (Tobin's Q) meaning a unit change in ownership concentration leads to a significant decrease in Tobin's Q of .0057. Association between ownership concentration and financial leverage, r = .1889 (p = .0002) meaning that high ownership concentration leads to an increase in financial leverage use. The study concludes: financial leverage significantly negatively affects performance; ownership concentration has a significant negative effect on performance; while ownership concentration and financial leverage associate positively. The study recommends: management should reduce financial leverage; reduce their ownership concentration and encourage association between financial leverage and ownership I concentration. The study may be useful in adding value to existing knowledge in finance and capital structure formulation.