Determinants of Financial Leverage in Non-Financial Firms Listed At the Nairobi Securities Exchange, Kenya
Abstract
The determinants of financial leverage are of significant importance to every single company. Non- financial firms are in particular sensitive to variations in leverage level because of the complexity of their capital structure composition, which must be adequate in order to provide an advantage in the financial performance. Presently most of the non-financial firms listed at the Nairobi securities exchange have undertaken growth strategies which necessitate enormous sum of funds. In many cases non-financial firms listed at the Nairobi securities exchange are taking debt as a major source of funding. For that reason, the objective of the research was to analyze the determinants of financial leverage level of non-financial firms listed at the Nairobi securities exchange, which consisted of finding out the impact of the firm size, tangibility of assets, profitability, taxes and non-debt tax benefits on financial leverage level of non-financial companies listed at the at the Nairobi securities exchange. The study used a quantitative research design with secondary data from audited and published annual reports of 12 non-financial firms randomly selected from a population of 44 non-financial listed at the Nairobi security exchange. The study covered a time period of 11 years (2008-2018) in order to get an accurate examination of the relationship between independent and dependent variables. After diagnostic tests and correlation tests, the research used a descriptive statistics and a panel least squares regression analysis with the help of E-views to measure the effect of the independent variables on the dependent variable. The results of the research confirmed a positive and significant relationship between firm size and leverage level, the results additionally revealed a significant and positive relationship between tangibility and leverage of non-financial firms quoted in Nairobi securities exchange, the growth opportunity was found with a positive relationship with the leverage of non-financial firms quoted in Nairobi securities exchange. However, the results of the research confirmed a significant negative relationship between profitability and financial leverage and a significant negative relationship between taxes and financial leverage of non-financial firms quoted in Nairobi securities exchange. The non-debt tax benefits were found insignificantly and negatively correlated with the financial leverage level of non-financial companies listed at the at the Nairobi securities exchange. The research concluded that the firm size, tangibility of assets, profitability and taxes affect the financial leverage of non-financial firms quoted in Nairobi securities exchange. However, the non-debt tax benefit did not affect financial leverage of non-financial firms quoted in Nairobi securities exchange. The study also concluded the non-financial firms with a better financial performance; prefer self-finance than debt in order to invest in new project. The research recommended that the non-financial companies should not emphasize in contracting more debt as the primary source of finance, they should use the debt on a certain level which is advantageous for the future growth of the company.
Keywords: Determinants, Financial, Leverage, Non-financial, Nairobi Security Exchange, Kenya, Tangibility, Firm Size
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