EFFECT OF DEBT FINANCING ON FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS IN NAIROBI SECURITIES EXCHANGE

Abstract

Every shareholder invests in a company with the dream of making wealth through the company’s great financial performance. The capital used in financing a business is made up of funding from owners and funding from lenders. Combining the two sources of funding creates the capital structure of a firm. Capital structure can therefore be defined as a mix of firm’s long term debt, short term debt, common equity and preferred equity. This is how a firm funds its whole operations and growth using different sources of financing. This is made up of equity, rights issue, and debt financing, credit market. This research sought to investigate the effect of short-term debt, long-term debt, interest rates and corporation tax rates on the financial performance of manufacturing firms listed in Nairobi Securities Exchange during a five year period of 2013-2017. The study employed use of multiple linear regression models because it considered the relationship between one dependent variable and more than one independent variable. Descriptive statistics, correlation and regression analysis were used to analyze the data. Statistical Package for the Social Sciences (SPSS) software was used to analyze the data. Accounts payable was found to be significant to ROA with a significance level of 0.00 which was less than 0.05. Bank overdraft was found not to be significant to ROA with significance level of 0.132 which is greater than 0.05 while debentures was found to be significant to ROA with a significance level of 0.016 which was less than 0.05. Bank loan and interest payments were found not to be significant to ROA with significance levels of 0.957 and 0.726 respectively which were both greater than 0.05. Interest on tax was found to be significant to ROA with a significance level of 0.014 which was less than 0.05 while Expenses deductibles were found not to be significant to ROA with a significance level of 0.480 which was greater than 0.05.