Effect of Financial Leverage on Financial Performance of Non - Financial Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Financial leverage, commonly expressed through the debt-equity ratio, plays an essential role in determining a firm's capital structure and has significant implications on its overall performance, especially in developing economies characterized by relatively underdeveloped economies. A firm’s financial performance depicts its capacity to utilize the available resources effectively and efficiently to generate resources and sustain long-term growth. While the scholars in the field have explored the correlation between financial leverage and financial performance, empirical findings remain inconclusive, with the studies reporting mixed findings. The study conducted a census on 32 non-financial listed firms, leading to 160 firm-year observations from 2019 to 2023. The study relied predominantly on secondary data gathered from the published financial reports and statements from the selected firms within the period. The study also employed descriptive statistics in the data analysis to provide valuable insights into understanding the data collected. Similarly, it utilized the inferential statistics methodology to examine the proposed relationship. After the analysis, the paper established that the financial leverage had a positive relationship but a statistically insignificant effect on financial performance, indicating that leverage alone cannot significantly explain the variations in the firm's performance during the period between 2019 and 2023. Based on the overall R squared figure; 4.22% of the variance in ROE of non-financial firms quoted at the NSE is explained by D/E ratio (coef. = 0.106, p = 0.410).

Keywords:       Financial Leverage, Financial performance, Nairobi Securities Exchange