Effect of Leverage on Financial Performance of Listed Firms in the Nairobi Securities Exchange
Abstract
The Kenya government, together with companies and individuals in the private sectors, has put concerted efforts in ensuring the existence of a favorable environment for doing business in the country. Consequently, while some firms listed in the NSE have improved in performance, there are others that have experienced declining fortunes and some have even been delisted from the NSE over the last decade. Significant efforts to turn around such companies or even liquidate them have focused mainly on restructuring of firm level factors. However, managers and practitioners still lack adequate guidance for attaining optimal decision on firm level factors. The specific objectives of the study was to determine the effect of leverage on financial performance of listed firms in the Nairobi securities exchange. The study employed panel research design that is non-experimental in nature. This study targeted all the 64 firms listed on the Nairobi Securities Exchange. A census of all the 64 firms listed in Nairobi Securities Exchange was used as a unit of analysis. Secondary data extracted from the financial statements was used to compute the relevant ratios and encompassed panel data. The study employed a dynamic panel data regression model while ANOVA was used to test the relationship between the variables across the sectors. Test of hypothesis was done at 95% confidence interval. The study found out that there was a negative and significant relationship between leverage and financial performance of financial and non-financial firms. Based on the findings, the study concluded that leverage has a negative and significant effect on financial performance of Listed Firms in the Nairobi Securities Exchange. Leverage allows a financial institution to increase the potential gains or losses on a position or investment beyond what would be possible through a direct investment of its own funds. The leverage ratio can thus be thought of as a measure of balance sheet or, to the extent that it also includes off-balance-sheet exposures economic leverage.
Keywords: Leverage, Financial Performance & Nairobi Securities Exchange.
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