EFFECT OF FINANCING DECISIONS ON FINANCIAL PERFORMANCE OF LISTED COMPANIES AT THE NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

The study focused on the effect of financing decision on financial performance of listed companies at Nairobi Securities Exchange. The specific objectives were capital structure, liquidity decision, dividend decision and investment decisions. The study targeted 66 listed firms at the NSE. Data spanning five years, 2012 to 2016 was collected. Ordinary least square regression approach was used for analysis. The study findings showed that capital structure has a positive but not significant effect on ROA but a positive and significant effect on ROE. Liquidity decision has a positive and significant effect on both ROE and ROA. It was also established that investment decision has a positive and significant effect on both ROA and ROE. However, dividend decision has a negative and not significant effect on both ROE and ROA. The study recommends that since debt to equity ratio can significantly affect returns on equity and assets significantly; there is a need for listed firms to balance their financing using debts and equity. There is a need to revise the financing policies to incorporate financing with less equity and more debts since it improves the returns. The study also recommends that since liquidity decision has a positive effect on financial performance of listed firms, there is a need for the listed firms to have a balance in their liquidity decisions by ensuring that they have enough current assets to offsets the current liabilities. This enables the day to day running of the business to be more easier and sustainable thus improving performance. The study also recommends that since investment decisions affect performance positively and significantly, there is a need for the listed firms to invest more in firm machinery, plants, equipment and property, so as to enhance the returns form these investments.

Key Words: Capital Structure, Liquidity Decision, Dividend Decision, Investment Decisions, Financial Performance