Mutuality between Capital Structure and Financial Performance: A Case of Listed Commercial and Service Sector Firms in Kenya
Journal Title: IOSR journal of Business and Management - Year 2018, Vol 20, Issue 9
Abstract
Capital structure refers to the mix of debt and equity used by a business organization to finance its assets (Ubesie, 2016). Usually, a firm can adopt different proportions of debt, equity, or other financial arrangements. The basisof research on capital structure is traced toModigliani and Miller’s (1958) theory. The theory offers insight into an organization’s capital structure decisions in a capital market that is free of transaction costs, taxesand other frictions.The purpose of this study was to determine the effects of capital structure on the financial performance of commercial and service sector firms listed in the Nairobi Securities Exchange in Kenya. The study sought to address the following specific objectives: the effects of long-term debt to equity ratio on return on assets, return on equity and earnings per share. The researcher employed descriptive research design to describe the variables used in the study. Later, explanatory research was used to explain the causal relationship between the independent variable and the dependent variables. The study population was made up of ten commercial and service sector firms listed at the Nairobi Securities Exchange as at 31st December 2017. Convenience sampling technique was used to select the nine firms based on the information available in their official websites and the Nairobi Securities Exchange research hand books. A checklist was used to collect data. Data collected was analyzed using both descriptive and inferential statistics with the aid of Statistical Package for Social Sciences (SPSS) version 24. The annual financial statements of 9 listed firms was used for this study covered a five-year period from 2013-2017. Regression analysis results showed that there wasa significant positive correlation between long-term debt to equity ratio and return on assets, return on equity and earnings per share.Further tests on the statistical significance as presented by the p-values reveal that the variables were statistically significant. The paper concluded that capital structure had a statistically significant effect on firms’ financial performance.
Authors and Affiliations
Kizito Ojilong Omukaga, Amida Daboh Nafisatu, Francis Mambo Gatumo PhD
Keywords
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- EP ID EP412976
- DOI 10.9790/487X-2009076571.
- Views 47
- Downloads 0
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