The Moderating Effect of Operating Cash Flows on the Influence of Firm Financial Characteristics on Leverage of Non-Financial Firms Listed at Nairobi Securities Exchange

Abstract

Whereas leverage as a source of financing is expected to influence financial management decisions, it is not clear whether and how firm financial characteristics do influence leverage decisions of non-financial firms listed at the Nairobi Securities Exchange. This lack of clarity emanates from confounding theoretical and empirical literature. Even though leverage has been adopted by both listed and non-listed companies, there are disparities in findings of empirical enquires on the interrelationship between firm financial characteristics and leverage. The general objective of this study was to establish of the effect of firm characteristics on leverage of non-financial firms listed at the Nairobi Securities Exchange. Five specific objectives were used as a basis of making conclusions of the study. Firm financial characteristics used in the study are tangibility of assets, profitability, firm size and growth opportunities. Moderating effect of operating cash flows on firm financial characteristics and leverage was evaluated. Theories used in the study include Modigliani and Miller capital structure irrelevance theory, trade-off theory, pecking order theory, market timing theory and free cash flows theory. Causal or explanatory research design was used. Target population consisted of 51 non-financial firms listed at the NSE over the period 2008-2016 and a census of all the 51 listed non-financial companies was used. Data was analyzed by use of descriptive statistics, correlation analysis and multiple regression analysis. The regression coefficients were tested for significance using t-statistics at 5% confidence level. Diagnostic tests conducted included auto correlation, multicollinearity, heteroscedasticity, stationarity, fixed and random effects, granger causality and normality. The study found out that 42.47%, 35.14% and 56.9% of variations in short term debt to total assets, long term debt to total assets and total debt to total assets respectively were accounted for by asset tangibility, profitability, firm size and growth opportunities. The study found that tangibility of assets had significant influence on short term to total assets, long term debt to total assets and total debt to total assets of listed non-financial listed firms at NSE. Further, profitability was found to have significant influence on short term to total assets. There was insignificant influence of profitability on long term to total assets and total debt to total assets respectively. On the influence of firm size on leverage, the study found significant effect on short term debt to total assets, long term debt to total assets and total debt to total assets of listed non-financial companies in NSE respectively. Growth opportunities had insignificant effect on short term debt to total assets, long term debt to total assets and total debt to total assets of listed non-financial companies in NSE. Operating cash flows had insignificant moderating influence on firm financial characteristics and leverage of listed non-financial companies in NSE. The study was limited to listed non-financial companies which may have limited the population. This was mitigated through use of data for nine years amongst the companies that were listed for at least three consecutive years within period under examination.