EFFECTS OF FINANCIAL STRUCTURE ON PERFORMANCE OF LISTED INVESTMENT FIRMS IN KENYA

Abstract

The purpose of this study was to determine the effects of financial structure on performance of listed investment firms in Kenya. In this study the independent variables included; shareholders capital and long term debt while dependent variable was firm’s performance. This study was underpinned by financial structure relevance theories; these include the Capital Asset Pricing Theory (CAPM) which is useful in estimating the cost of equity for firms and evaluating the performance of managed portfolio. Trade-off theory which asserts that optimal capital structure is based on a trade-off between the tax benefits of debt and the costs of financial distress. The study employed descriptive research design with secondary data from the financial statements of 3 investment firms which was retrieved from the securities exchanges hand books for the period 2006-2016. Data was analysed using trends, descriptive statistics, correlations and multiple regressions with the aid of Statistical Package for Social Sciences (SPSS) version 21. The study finding revealed that long term debt and ordinary share capital had a significant positive relationship with ROA. Long term debt was found to be positively and significantly related to ROE of listed investment firms. The study concluded that the financial structure of the firm is a key component that affects the performance. Therefore, firms must strike a balance between debt financing and equity financing in order to maximize the returns. The study further concluded that long term debt is a proper mode of financial leverage as compared to short term debt since it is less riskier to finance using long term debts and finally there was a strong positive relationship between the study variables as shown by 0.695 ROA and 0.726 ROE implying that increase in financial structure leads to improvement in performance. The study recommended that investment as well as other listed firms should manage their short term debts through improving their working capital management practices. This is because high-growth firms might have more options for future investment than low-growth firms since highly leveraged firms are more likely to pass up profitable investment opportunities, because such an investment will effectively transfer wealth from the firm's owners to its debt holders.