Effect of Capital Structure on Financial Performance of Consumer Goods Firms Listed in the Nairobi Securities Exchange
Abstract
Capital structure of a firm is a subject of great interest worldwide. The area has received much attention in developed countries compared to their developing counterparts. Research on capital structure has mainly focused on understanding the forces behind corporate financing behaviour of large listed firms. Firms in developed economies operate in close to similar economic environment however this is not the case with developing economies. The main aim of this study was to establish the effect of capital structure on financial performance of consumer goods firms listed on the NSE. The specific objectives of the study were: to establish the effect of debt ratio on financial performance of consumer goods firms listed on the NSE and to determine the effect of firm size (control variable) on financial performance of consumer goods firms listed on the NSE. The study employed panel research design. This study targeted 12 firms listed on the Nairobi Securities Exchange. A census of all the 12 firms listed in Nairobi Securities Exchange was used as a unit of analysis from the year 2012 to 2016. Secondary data extracted from the financial statements was used to compute the relevant ratios. The study employed a dynamic panel data regression model and Eviews software was used for data analysis. The results showed that debt ratio had a negative coefficient of -0.401967 and a t-statistic of -6.006392. The p-value of 0.0000 suggests that the relationship is statistically significant at 5% significant level since the value is lower than the critical p-value of 0.05. The null hypothesis is debt ratio does not have a statistically significant effect on financial performance of consumer goods firms listed on the NSE. The study adopted the alternative hypothesis that debt ratio have a statistically significant effect on financial performance of consumer goods firms listed on the NSE. The results also indicated that firm size has a positive coefficient of 0.080114 and a t-statistic of 4.085403. The p-value of 0.0002 suggests that the relationship is statistically significant at 5% significant level since the value is lower than the critical p-value of 0.05. The null hypothesis is firm size does not have a statistically significant effect on financial performance of consumer goods firms listed on the NSE. The study adopted the alternative hypothesis that firm size has a statistically significant effect on financial performance of consumer goods firms listed on the NSE. From the findings of the study it was concluded that debt ratio and firm size were found to be important aspects of capital structure influencing financial performance of consumer goods firms listed on the NSE. The study recommends a balance when financing a firm through either debt or equity. The study recommends that NSE listed consumer goods firms with high levels of current assets should consider using more equity to finance their daily operations. The study recommends prudent use of firms resources to ensure that firms goals and objectives are attained. This way a firm can increase its revenue base.
Key words: Consumer goods, capital structure, firm size, financial performance
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