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EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE OF KENYA

 

Eric Mutuma Gatobu

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

Corresponding Author email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

Dr. Allan Kihara

College of Human Resource and Development,

Jomo Kenyatta University of Agriculture and Technology

P. O. Box 62000, 00200 Nairobi, Kenya

 

 

CITATION: Gatobu, E., M. & Kihara, A. (2018). Effect Of Capital Structure On Financial Performance Of Firms Listed At The Nairobi Securities Exchange Of Kenya. International Journal of Economics and Finance. Vol. 7 (4) pp 46 – 64.

 

ABSTRACT

 

In as much as capital structure topic continues to dominate the corporate finance, its effect on financial performance continuous to yield mixed results. However, the way a business balances its capital structure affects its financial performance. For the last decade, the performance of firms listed at NSE has been mixed and has greatly been linked to capital structure. With these failures of listed firms being linked to capital structure, and with the findings of capital structure affecting financial performance yielding mixed results, there was a need to establish the exact position in Kenya. The study therefore focused on the effect of Capital Structure on Financial Performance of Firms Listed at the Nairobi Securities Exchange. Specifically, the study focused on retained earnings, shareholders equity, total debts and total debts to assets ratio. The study adopted a descriptive survey design. The target population of the study consisted of all the 66 listed firms at NSE in the year 2016. Data spanning 10 years was collected on the study variables from the year 2007 to the year 2016. Data analysis entailed the use of SPSS version 21 to establish the descriptive and inferential analysis. The study findings revealed that retained earnings and return on assets of listed investment firms are positively and significantly , shareholders equity and return on equity of firms listed at NSE in Kenya are positvely and significantly related, total debts leads to a negative but insignificant effect on return on equity of firms listed at NSE and total debts to assets ratio is positively and significantly related to return on equity of firms listed at NSE in Kenya. The study recommends that since retained earnings and total debts to assets ratio have a positive and significant effect on ROE of the firms listed at NSE in Kenya , the study recommends that there is need for the firms to adopt strategies that would increase as well as utilize the retained profits generated from the operations to acquire more assets and improve their financial performance.It was also recommended that asset tangibility should be a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained. The study also recommends that the firms listed at NSE as well as any other firm should manage their total debts and equity since they have a negative significant effect on ROE.

 

Key Words : Retained Earnings, Shareholders Capital, Total Debts, Ratioof Total Debts to Assets

 

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