Moderating effect of firm size on the relationship between financial leverage and financial performance of non-financial firms listed in the NSE, Kenya

Abstract

Performance of non-financial firms is perceived to be influenced by firm size and financial leverage among other factors based on the theory of economies of scale. Most studies carried out in Kenya focused on financial firms and single set of performance measures hence, limited knowledge on the combined synergetic effect of accounting and market based measures of performance for nonfinancial firms. This study therefore sought to establish the moderating effect of firm size on the relationship between financial leverage and financial performance of non-financial firms listed in Nairobi Securities Exchange (NSE) using accounting based and market based measures of performance (ROE and Tobin’s) and panel methodology. The study used a correlation research design. The target population was 47 non-financial firms listed at NSE between 2012 and 2018 where 28 firms were purposively sampled and pooled for 7 years to obtain 196 firm year observations. Firm size is a significant positive predictor of performance (ROE), β = 0.0972 (P = 0.0196) and Tobin’s Q, β = 0.0578 (P = 0.0006) meaning a unit change in firm size leads to a significant increase in ROE and Tobin’s Q of 0.0972 and 0.0578, respectively. Model coefficient interaction term was negative but significant for (ROE) β = -.0368563, (p = 0.001) and Tobin’s Q, β = -.0368563), (p = 0.001) implying that firm size negatively moderates the relationship between financial leverage and performance. The study concludes that firm size moderates the relationship between financial leverage and financial performance. The study recommends that management of the non-financial firms listed at NSE should take into consideration the size of their firms in making leverage choices since firm size moderates this relationship negatively.