Effect of Capital Structure on Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange
ABSTRACT: The study investigated the effect of capital structure on financial performance of manufacturing firms that are listed at the Nairobi Securities Exchange. The population of the study consisted of 8 manufacturing and allied firms. The period of study was over 8 years (eight-years) period from 2013 and 2020. The study used secondary data. Multilinear regression model was used to assess the financial performance of these manufacturing firms that are quoted at NSE. Both descriptive statistics and Pearson correlation matrix was used to assess the outcome of the study. The following results were found: A unit increase in the debt in the firm capital structure results in a -0.782 decrease in the financial performance of the manufacturing firms while an increase in one unit of equity results in 0.667 increase in financial performance of the firms. There was negative correlation between the debt ratio and the financial performance and a positive correlation between equity and financial performance of manufacturing firms. The study also showed that firm’s liquidity level has a positive influence on the financial performance, which indicates that, the more liquid a firm is in meeting its short term obligations the more profitable it becomes. The study concludes that there is a strong positive relationship between capital structure at channels and firm financial performance of manufacturing firms listed at Nairobi Securities Exchange and that 64.6% of the total changes in financial performance of the manufacturing firms. This can be attributed to changes in the debt level in the capital structure, equity, firm’s liquidity, firm size and firm growth. The study shows that equity, firm’s liquidity, firm size and firm growth affects financial performance of the manufacturing firms’ performance positively and in a statistically significant way. Which indicates that, the more liquid a firm is in meeting its short term obligations the more profitable it becomes. The study concludes that firm size is positively correlated with the financial performance of firms listed at NSE.
