Financial Structure, Firm Size and Financial Growth of Non-Financial Firms Listed at Nairobi Securities Exchange

Abstract

A significant number of the non-financial firms listed at the Nairobi Securities Exchange (NSE) have been experiencing declining financial performance and financial growth, which deter investors from investing in such firms. It is not clear whether an optimal financial structure can lead to the financial growth of the firm. In addition, there exists a great dilemma for scholars, business managers, investors, among other stakeholders, as to whether there exists an optimal financial structure that maximizes the financial growth of the firm. This study aimed at establishing the effect of financial structure on the financial growth of non-financial firms listed at the Nairobi Securities Exchange. The study was guided by the Modigliani-Miller theory, Agency Theory, Pecking Order Theory, Trade-off Theory, Market Timing Theory and Theory of Growth of the Firm. An explanatory research design was adopted. The target population of the study comprised of 45 non-financial firms listed at the NSE for a period of ten years, from 2008 to 2017. The panel model revealed that short term debt, long term debt, retained earnings and share capital explain 61.36% of variations in financial growth as measured by growth in earnings per share and 65.57% of variations in financial growth as measured by growth in market capitalization. Short term debt has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.024095, p=0.013) and growth in market capitalization (β=0.028529, p=0.006). Long term debt has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.864088, p=0.000) and growth in market capitalization (β=0.958656, p=0.000). Retained earnings have a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.951749, p=0.015) and growth in market capitalization (β=0.043784, p=0.004). Further, share capital has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.007016, p=0.000) and growth in market capitalization (β=0.09635, p=0.001). Firm size significantly intervenes in the effect of financial structure on the financial growth of non-financial firms listed at the Nairobi Securities Exchange measured using growth in earnings per share. However, Firm size does not intervene in the effect of financial structure on the financial growth of non-financial firms listed at the Nairobi Securities Exchange measured using growth in market capitalization. The study concludes that short term debt, long term debt, retained earnings and share capital positively influence financial growth as measured by both growths in earnings per share and growth in market capitalization. The study recommends that the management of non-financial firms listed at the NSE to balance financing a firm using debt and equity. The study also recommends that the management of non-financial firms listed at NSE encourage its shareholders to re-invest back their earnings rather than consuming them as dividends. The study further recommends reviewing equity issuance policies by the Capital Market Authority (CMA). The policies regarding equity issuance need to be reviewed to focus on how to improve earnings per share, market capitalization and enhancement of the value of non-financial firms listed at NSE for the benefit of its stakeholders. Financial structure varies significantly depending on the sector in which a firm operates. There is a need to conduct a comparison study to establish the effect of financial structure on the financial growth of non-financial firms versus financial firms listed at the Nairobi Securities Exchange. The comparison study will tell which form of financing is appropriate for non-financial firms and which one is appropriate for financial firms.