Relationship between use of Interest bearing Debt and Financial Performance of Listed firms in Kenya

Abstract

Company financial performance has emerged to be a key issue in addition to other goals firms exist to meet. This study aimed at studying the relationship between the use of interest bearing debt and financial performance of listed firms in Kenya. The variables studied were the size of the firm, number of directors, extend of audit work and the working capital management. The study involved all the 65 firms that are listed in the Nairobi Securities exchange. Secondary data on the mentioned variables was collected from published financial statements of the listed firms using a data collection schedule. Regression analysis was used in determining the relationship. The research findings revealed that use of interest bearing debt has a positive significant effect on the financial performance of listed firms in Kenya. Based on this finding, managers should not have a negative attitude towards loans as if well utilized they will increase financial performance which forms a good basis for shareholder wealth maximization. Policy makers should also base their decision making on this research finding to make debt markets more accessible as they increase financial performance of economic units which will in turn increase the status of the economy as a whole. More specifically, the government should maintain the interest rate capping and expand the control to cover all credit facilities in the country in order to enable the positive impact be felt. The research agrees with the policy makers that cheap loans will be more accessible and will increase the economic performance in the whole economy. It was also established that the extend of audit function as measured by the audit cost, management of working capital and the board size affect firm financial performance in a way. Whereas the audit function affects the financial performance positively, the liquidity levels and big board sizes affect the financial performance negatively. Research findings also suggest that too much liquidity affects financial performance negatively. Based on this, the researcher recommends having the minimum possible liquid assets to optimize on them.

Keywords: Debt, Financial Performance, Interest Bearing