CAPITAL STRUCTURE, LIQUIDITY AND FINANCIAL PERFORMANCE OF NON FINANCIAL FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Abstract

This paper examines the effect of capital structure on the financial performance of the and nonfinancial firms listed at the Nairobi Securities exchange. It also examines how this relationship is intervened by liquidity. Additionally, it evaluates the existence of equilibrium\disequilibrium relationship among the variables. The study analyzed unbalanced panel data sourced from across 53 nonfinancial firms listed at the Nairobi Securities Exchange covering 2010 to 2017. Total debt to total equity was used for assessing the capital structure of the listed nonfinancial firms. The indicator of liquidity was asset liquidity and was operationalized by the ratio of current assets to current liabilities. Financial performance attribute was operationalized by Tobin’s Q. Analysis of data was done using descriptive statistics, multiple and simple regression analyses. The study showed that leverage positively and significantly affected the financial performance of the listed nonfinancial firms. Furthermore, liquidity has a positive intervening effect on capital structure and financial performance relationship. The conclusion from the study is that companies should strive to raise their liquidity as long as it does not cause instability to the firm. This is due to the finding that liquidity has a statistically significant positive effect on the financial performance of the NSE listed nonfinancial firms. The study further concludes that company managers should strive to enhance an optimum balance of current assets and current liabilities in firms because they help in enhancing a firm’s capability in meeting its current obligations. Furthermore, because it has a significant positive effect on the financial performance of the NSE listed nonfinancial firms statistically.

Key Words: Financial performance, Tobin’s Q, Capital structure, Liquidity, Multiple regression analysis