Capital Structure and Financial Performance of Manufacturing Companies Listed at the Nairobi Securities Exchange in Kenya

Abstract

The mix of debt and equity that a business uses to finance its operations is referred to as its capital structure. Thus, it is the configuration of an organization's primary financial sources. Funding for this study came from equity, loan financing, and lease financing. One of the key choices that managers of a company must make in order to accomplish the company's objectives is capital structure. Finding out how capital structure impacted the financial performance of manufacturing companies listed on the Nairobi Securities and Exchange was the main goal of the study. The study's specific goals were to ascertain how the financial performance of manufacturing companies was impacted by loan finance, which was the primary source of outside funding, equity finance, which included the amount of retained profits reinvested in the company, and lease finance, which is defined as the agreement made between a specific asset owner (lessor) and the lessee.  Four theories—trade-off theory, pecking order theory, information signalling theory, and agency theory—formed the basis of the study's theoretical model.  In order to finish the study, a descriptive research design was used in conjunction with a quantitative research approach.  Nine manufacturing firms that are openly traded on the NSE were surveyed.  The NSE and the financial statements made public by Kenyan manufacturing companies listed on the NSE provided secondary data for the study. Secondary data was collected annually between 2013 and 2022. The study's instrument for gathering data was a data collection sheet, and a panel regression model was used. Descriptive and inferential analysis were also used to draw conclusions from the information gathered. An indirect association was discovered when the impact of loan financing was investigated. While the relationship between equity finance and return on equity revealed a clear association, a lower level of loan finance was linked to an increase in the return on equity of the enterprises under consideration. Additionally, the statistical study showed that the dependent variable, return on equity, and the chosen capital structure factors had a strong association. According to this study, the model has a strong explanatory power, accounting for almost 93% of the variance in return on equity.