CAPITAL STRUCTURE, FIRM SIZE AND FINANCIAL PERFORMANCE OF COMMERCIAL AND SERVICES FIRMS LISTED ON THE NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

The capital structure and size of a corporation are two of the most important factors that affect its financial performance when it is listed on a capital market. To help the firm grow and become financially stable, there should be a good mix of debt and equity in its capital structure. The present study aimed to elucidate the relationship between capital structure and the financial performance of commercial and service organizations listed on the Nairobi Securities Exchange in Kenya, as influenced by firm size. The study's premise aimed to determine the impact of equity capital and long-term debt financing on the financial performance of commercial and service enterprises listed on the Nairobi Securities Exchange. Additionally, the moderating effects of firm size on the relationship between capital structure and financial performance, as well as the independent impacts of equity financing, long-term debt financing, and firm size on the financial performance of commercial and service firms listed on the Nairobi Securities Exchange, were evaluated and established. The research utilized the Modigliani-Miller, trade-off, agency, and pecking order theories to elucidate the managerial decisions concerning the enterprises' capital structure. The present study utilized a descriptive cross-sectional research approach. The target population consisted of 13 services and commercial enterprises registered on the Nairobi Security Exchange. The secondary data was gathered via a data collection sheet pertaining to the audited financial statements of the companies from 2015 to 2024. We used STATA software version 18 to look at the data in both descriptive and inferential statistics. The panel data regression analysis was utilized to ascertain the correlation between the variables, and the hypothesis was evaluated at a 5% significance level using the t-statistic and the F-statistic. The results were shown in tables and charts. The results showed that both total equity and long-term debt have statistically significant negative effects on financial performance, with coefficients of –0.077 (p < 0.001) and –0.185 (p = 0.002), respectively. This indicated that a greater extent of equity financing and long-term debt correlates with deteriorated financial performance, potentially due to elevated financial costs or an ineffective capital structure. company size exhibited a negative coefficient (–0.045); however, the association lacked significance at the 5% level (p = 0.087), suggesting that the influence of company size on performance is either minimal or indeterminate within the model. So, the results demonstrated that relying too much on outside funding, whether it's equity or debt, could hurt a company's success. The study suggested that businesses should be careful and find a balance when making decisions on how to finance themselves. Both equity financing and long-term debt have big negative consequences on financial performance, therefore managers shouldn't rely too much on either type of capital. Instead, companies should try to optimize their capital structure by keeping the right balance of internal and external funding that keeps costs low and returns high. The present study is expected to assist regulatory entities, including the Capital Markets Authority (CMA) and the Nairobi Securities Exchange (NSE), in the formulation and execution of policies.