Effect of Capital Structure on the Financial Performance of Non-Financial Firms Quoted at the Nairobi Securities Exchange

Choosing whether to finance a business with debt or equity has led to a never-ending search for the best capital structure. Researchers have conducted several research studies trying to find out the optimal capital structure. Some indicate that a firm having a high degree of leverage seems to have an optimal capital structure and thus leads to better financial performance. There are others such as that of Modigliani-Miller that differs in argument by concluding that high leverage does not influence the value of the firm. This research study aimed at determining the impact of capital structure on the financial performance of non-financial firms quoted at the Nairobi Securities Exchange. The study was conducted on 16 non-financial firms that were in operation in Kenya and quoted at the NSE between 2013 and 2017. Financial performance was measured by return on assets and return on equity, while the capital structure was measured using the change in debt and debt-equity ratio. Secondary data utilised was obtained from audited financial statements derived from company websites and NSE handbook covering the period 2013 to 2017. Correlation and regression analysis were employed in the statistical analysis that was carried out with the aid of STATA version 15. The findings showed that capital structure has a direct influence on the financial performance of firms listed at the Nairobi bourse. The results showed that the financial performance of firms increases with the increase in the changes in debt in the capital structure. This thus supports debt financing in running the firms as compared to equity financing. The study thus recommended that firms should increase debt financing in their capital structure in order to enhance financial performance and increase value to the companies’ stakeholders.