Capital Structure, Firm Characteristics, Corporate Governance and Financial Performance of Non-Financial Firms Listed At Nairobi Securities Exchange in Kenya

Abstract

Globally, the choice of an optimal capital structure has posed a great challenge to most firms. In Kenya, some firms have achieved optimum levels while others are still faced with serious capital structure issues. Theoretically, there is a general inclination that capital structure employed automatically affects financial performance. It is against this background, that the study sought to establish the effect of capital structure on financial performance, moderating effect of firm characteristics and mediating effect of corporate governance on the relationship between capital Structure and financial performance of non-financial firms listed in Kenya. The specific objectives were: to establish the effect of capital structure on financial performance; establish the moderating effect of firm characteristics on the relationship between capital structure and financial performance; examine the mediating effect of corporate governance on the relationship between capital structure and financial performance; and determine the joint effect of capital structure, firm characteristics and corporate governance on financial performance. The study was grounded on Modigliani and Miller Irrelevance Theory, Trade-off Theory, Pecking Order Theory and Agency Theory. The sample size of the study consisting of 33 (thirty-three) non-financial firms from 2009-2018 were selected using purposive sampling procedure. Longitudinal and cross sectional research designs were used organized as panel data. Data analysis was done using descriptive and inferential statistics aided by STATA software. The findings revealed that: first, capital structure (composite score) had a significant effect on financial performance; secondly, firm characteristics had no moderating effect on the link between capital structure and firm performance; thirdly, corporate governance mediates the link between capital structure and financial performance; lastly, capital structure, firm characteristics and corporate governance had a joint effect on firm‟s performance. The study brings out an increased understanding on the link between capital structure and financial performance, the use of moderating and mediating variables with prudence so as to achieve optimum financing portfolios. Finally, the study recommends the following; first, the Nairobi Securities Exchange and Capital Market Authorities to ensure financial and corporate governance policies are adhered to; secondly, the government of Kenya should create an enabling environment for investors to increase their asset portfolio and size; and lastly; there should be a synergistic effort by stakeholders to uphold, strengthen and encourage good corporate governance in listed firms in Kenya.