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Effect of Debt Financing on Performance of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

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Effect of Debt Financing on Performance of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya EFFECT OF DEBT FINANCING ON PERFORMANCE OF NON-FINANCIAL FIRMS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA BY OCHIENG KENNEDY OKOTH A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION DEPARTMENT OF ACCOUNTING AND FINANCE MASENO UNIVERSITY © 2017 DECLARATION I declare that this research project is my original work and has never been presented for any examination. Okoth Kennedy Ochieng ................................. ............................... (MBA/BE/6005/15) Sign Date This research project has been submitted for examination with my approval as the university supervisor. Dr. Adoyo P. O. ................................. ........................... Department of Finance and Economics Sign Date Maseno University ii ACKNOWLEDGEMENT I thank God the almighty for giving me wisdom and strength to complete the project. Great appreciation also goes to my supervisor for his time and dedication to ensure that I completed the project. iii DEDICATION This project is dedicated to my family members who continuously inspired and supported my efforts throughout this study, may God bless you abundantly. iv ABSTRACT Various firm stakeholders have interest in the financial health of their firms. Efforts to increase financial performance of companies have focused on financial restructuring. The effectiveness of this strategy has however not been empirically proven since the studies have also produced mixed results. Despite aggressive strategies, firms still encounter financial distress as evidenced by liquidity and bankruptcy problems. The purpose of this study was to determine the effect of debt financing on financial performance of non-financial firms listed at the Nairobi securities Exchange. The specific objectives of the study were to establish the effect of debt to equity ratio of non financial firms listed at the Nairobi securities exchange on their return on equity, to establish the effect of interest coverage ratio of non financial firms listed at the Nairobi securities exchange on their return on equity and to establish the controlling effect of firm size of non financial firms listed at the Nairobi securities exchange in the relationship between debt financing and financial performance of non-financial firms listed at the Nairobi securities exchange. This study was based on the stakeholder theory. The study used a correlation research design. The target population were the 64 firms listed at the Nairobi Securities Exchange. The study period was six years from 2011 to 2016. The research used secondary data collected from the Capital Markets Authority and from individual firms’ financial reports; data analysis by multiple regression. The findings were as follows: With respect to the effect of debt to equity ratio on return on equity, the regression findings revealed a p- value of (0.000) and a beta value of (0.999), With respect to effect of interest coverage ratio on return on equity the regression results indicates a p-value of (0.620) and a beta value of 0.001 and With respect to the effect of firm size on return on equity, the regression finding revealed a p-value of (0.419) and a beta value of 0.002. The study concluded that there is need for efficient management of debt as a source of capital. The study recommends that firms should use debt as much as possible so that they benefit from positive effect of borrowing, which includes interest deductibility of debt and reduction of agency costs. Special consideration should also be taken to ensure that the assets financed by the borrowed funds bring in a higher return than the interest the firms are paying for the debts. The study is of significance to the stakeholders of the companies such as managers, potential investors, shareholders, debt holders, the government and researchers in the field of finance. v TABLE OF CONTENTS TITLE PAGE................................................................................................................i DECLARATION .................................................................................................................. ii ACKNOWLEDGEMENT.................................................................................................... iii DEDICATION .................................................................................................................... iv ABSTRACT ......................................................................................................................... v TABLE OF CONTENTS ..................................................................................................... vi LIST OF ABREVIATIONS AND ACRONYMS ............................................................... viii DEFINITION OF OPERATING TERMS ............................................................................ ix LIST OF TABLES ................................................................................................................ x LIST OF FIGURES ............................................................................................................. xi CHAPTER ONE:INTRODUCTION.................................................................................. 1 1.1 Background of the Study ................................................................................................. 1 1.2 Statement of the Problem ................................................................................................ 6 1.3 Objectives ....................................................................................................................... 7 1.4 Research Hypotheses....................................................................................................... 7 1.5 Scope of the Study .......................................................................................................... 8 1.6 Justification of the Study ................................................................................................. 8 1.7 Conceptual Framework ................................................................................................... 9 CHAPTER TWO: LITERATURE REVIEW .................................................................. 10 2.1 Theoretical Literature .................................................................................................... 10 2.1.1The Stakeholder Theory .............................................................................................. 10 2.1.2The Pecking Order Theory .......................................................................................... 12 2.1.3 The Trade-off theory .................................................................................................. 14 2.2Review of Empirical Studies .......................................................................................... 15 CHAPTER THREE: METHODOLOGY ........................................................................ 18 3.1. Research Design ........................................................................................................... 18 3.2 Study Area .................................................................................................................... 18 3.3 Target Population .......................................................................................................... 18 3.4 Sample and Sampling Techniques ................................................................................. 18 3.5 Data Collection ............................................................................................................. 18 3.5.1Data Type and Sources ................................................................................................ 19 3.5.2Data Collection Procedure ........................................................................................... 19 vi 3.5.3 Instrument for Data Collection ................................................................................... 19 3.6.DataAnalysis ................................................................................................................. 20 3.6.1Regression Mode........................................................................................................ l20 CHAPTER FOUR: RESSULTS AND FINDINGS .......................................................... 21 4.1 Data analysis and Presentation of Findings .................................................................... 21 4.1.1 Response Rate ............................................................................................................ 21 4.1.2 Descriptive Statistics .................................................................................................. 21 4.1.3 Correlation Analysis ................................................................................................... 21 4.1.4Regression Analysis .................................................................................................... 23 4.1.4.1Model Summary ....................................................................................................... 23 4.1.5Analysis of Variance ................................................................................................... 23 4.1.6Regression Coefficients ............................................................................................... 24 CHAPTER FIVE .............................................................................................................. 26 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .....................................
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