Title:
The Effect of Financial Leverage on Financial Performance of Non- Financial Firms Listed in the Nairobi Securities Exchange, Kenya

Authors:
Collins Sitienei, Dr. James Nyamu and Dr. Joseph Masinde, Kenya

Abstract:

This study determined the effect of financial leverage on financial performance of non-financial firms listed at NSE (Nairobi Securities Exchange). This study was anchored on the Trade-off theory, adopted a mixed approach research design comprising of descriptive, causal and longitudinal designs to a study population of 40 non-financial firms listed at NSE where 29 firms were purposively sampled and pooled for 14 years (2010-2023) to obtain 406 firm-year observations. Data was obtained from the NSE website, World Bank reports as well as Capital Market Authority website. Diagnostic tests were conducted in order to prepare the data for regression analysis. In cases where the assumption of ordinary least squares was violated, panel corrected standard errors were recalculated. A transformed regression model-feasible generalized least squares was fitted in case of existence of autocorrelation and heteroscedasticity. The study findings revealed that debt -to-equity ratio (DER) had a statistically significant positive effect on financial performance while interest coverage ratio (ICR) had a statistically significant negative impact on financial performance. Debt -to – asset ratio (DAR) showed no statistically significant effect on financial performance.The study expands the existing base of knowledge on financial leverage and financial performance on listed non-financial firms in the Kenyan context. The study emphasizes on the importance of adopting a strategic approach to capital structure decisions. Firms should carefully consider their specific circumstances when determining appropriate leverage levels. The findings particularly highlight the value of maintaining a balanced debt-to-equity ratio while avoiding excessive interest burdens.

DOI: https://doi.org/10.51505/IJEBMR.2025.9714