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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 72 Relationship between Capital Structure and Performance of Non- Financial Companies Listed In the Nairobi Securities Exchange, Kenya Lucy Wamugo Mwangi , Department of Accounting and Finance, School of Business, Kenyatta University. Muathe Stephen Makau, Department of Business Administration, School of Business, Kenyatta University. George Kosimbei, Department of Economic Theory, School of Economics, Kenyatta University. _____________________________________________________________________ Abstract Corporate failure among companies in Kenya has often been associated with the financing behaviour of the firms. Momentous efforts to revive the ailing and liquidating companies have focused on financial restructuring. A great dilemma for management and investors alike is whether there exists an optimal capital structure and how various capital structure decisions, both short-term and long-term, influence business performance. This study therefore investigated the relationship between capital structure on the performance of non-financial companies listed in the Nairobi Securities Exchange (NSE), Kenya. The study employed an explanatory non- experimental research design. A census of 42 non-financial companies listed in the Nairobi Securities Exchange, Kenya was taken. The study used secondary panel data contained in the annual reports and financial statements of listed non-financial companies. The data were extracted from the Nairobi Securities Exchange hand books for the period 2006-2012.The study applied panel data models (random effects). Feasible Generalised Least Square (FGLS) regression results revealed that financial leverage had a statistically significant negative association with performance as measured by return on assets (ROA) and return on equity (ROE). The study recommended that managers of listed non-financial companies should reduce the reliance on long term debt as a source of finance. ___________________________________________________________________________ Key words : capital structure, non-financial companies
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Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics (GJCRA) An Online International Research Journal (ISSN: 2311-3162) 2014 Vol: 1 Issue 2 73 1. Introduction The importance of financing decisions cannot be over emphasised since many of the factors that contribute to business failure can be addressed using strategies and financial decisions that drive growth and the achievement of organizational objectives (Salazar, Soto & Mosqueda, 2012). The finance factor is the main cause of financial distress (Memba & Nyanumba, 2013). Financing decisions result in a given capital structure and suboptimal financing decisions can lead to corporate failure. A great dilemma for management and investors alike is whether there exists an optimal capital structure. The objective of all financing decisions is wealth maximisation and the immediate way of measuring the quality
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