EFFECT OF PROFITABILTY ON THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND VALUE OF NON-FINANCIAL FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Abstract

Capital structure is critical in the determination of the survival and the firm values since it aids in
describing how their finances are raised through equity, debt or firms combining equity and debt.
It is argued that debt use is beneficial provided that the acquisition rates are favorable and the
monies are well utilized. Current research aimed at assessing the influence of profitability on the
relationship between capital structure and the value of non- financial firms listed at the NSE. The
research was anchored on trade off theory and positivism philosophy. This study utilized panel
data of the twenty- nine listed entities. The research relied on secondary data from the published
reports which were availed from various websites of the twenty- nine non-financial firms.
Collection of data was from 2013 to 2020. Descriptive statistics and inferential statistics were
employed. Descriptive statistics was used in the analysis to aid in deep understanding of the
specifics of collected data. Prais Winsten Panel regression was utilized in the inferential analysis.
The study confirmed that equity ratio and firm value were positively related and statistically
significant and the link between debt ratio and value was negative and significant. This implies
that, there is a real relationship and it’s unlikely that it’s a one-off occurrence. The study further
found no intervention of profitability in the link between capital structure and value. This study
supports the need for injecting more money inform of equity instead of relying heavily on borrowed
funds. Study further recommends that; entities should avoid very high levels of debt since it
exposes them to financial distress.
Keywords: capital structure, profitability, firm value, Nairobi securities exchange.