EFFECT OF CAPITAL STRUCTURE DETERMINANTS ON FINANCIAL PERFORMANCE OF NON-FINANCIAL FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

A review of empirical literatures on capital structure determinants reveals that there exists conflicting results about the correlation of capital structure determinants and financial performance of firms. Therefore, the many years question on how firms choose their capital structure and how it affects their financial performance still remain unanswered. Theconsisted 37 non-financial firms listed at NSE and covering the 5 year period from 2011 to 2015 and adopted descriptive research design.The study’s core objective was therefore to explore how capital structure determinants affect the financial performance of non-financial firms listed at NSE, Kenya. While the explicit objectives involved establishing the impact of the following firm specific capital structure determinants (asset tangibility; AT, firm size; FS, firm liquidity, FL and growth opportunities; GO) on ROA as a measure of financial performance. The study revealed that only 5.4% of the variations in the finance performance of non-financial firmswas explained by the variations in the explanatory model variables while 94.6% could be explained by other factors that are not covered by this study. From the study findings, structure determinants generally have a positive relationship with financial performance of listed non-financial firms. Firm size and firm liquidity showed a significant positive relationship with financial performance while growth opportunities have a positive but not significant correlation. The results of the study also revealed that firm liquidity is the most significant or influential variable in the model. Asset tangibility revealed a negative relationship with financial performance of listed non-financial firms but not significant. The results from the hypothesis testing of asset tangibility and growth opportunities were not significant on the financial performance of the listed non-financial firms and therefore were not rejected while those for firm size and firm liquidity were rejected.