Effect of financial leverage on financial performance of nonfinancial firms listed in the nse, kenya

Abstract

Global average contribution of listed non-financial firms to Gross National Product stands at 50% whereas contribution of non-financial firms listed in Nairobi Securities Exchange (NSE) remains at 13.4% between 2012 and 2018. These firms have faced numerous challenges ranging from declining after tax profits, delisting or suspension at 21.3% from NSE and increasing debt levels from Ksh. 36bn to Ksh. 278bn between 2012 and 2018 indicating that financial leverage also remains a challenge. The purpose of this study was to analyze financial leverage and financial performance relationship of non-financial firms listed in NSE, Kenya. The study was anchored on trade-off and Signaling theories. 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. Results show financial leverage is a significant positive predictor of performance (ROE), β = 0.1418 (P = 0.0430) and Tobin’s Q, β = 0.0220 (p = 0.0071) meaning a change in financial leverage leads to a significant increase in ROE and Tobin’s Q of 0.1418 and 0.0220, respectively. The study concludes that financial leverage significantly and positively affects firm performance. The study recommends that the management should enhance financial leverage in making leverage choice decisions. Findings may be useful to academia as a basis of further research in finance.