Effect of Financial Leverage on the Financial Performance of Construction and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

This paper aimed at determining the effect financial leverage on the financial performance of construction and allied firms listed at the Nairobi Securities Exchange. Study established that debt ratio has a positive connection with return on assets and the connection is significant which implies that high leverage leads to better financial performance. Results further established that firm size has a negative association with return on assets and the association is insignificant. This means that financial performance tends to decline as companies grow larger. Firm age was confirmed to have a positive connection with returns on assets, and the interconnection is significant which confirms that older firms tend to perform better compared to smaller ones. Finally, liquidity has a positive association with return on assets, and the association is significant which implies that, when firms maintain higher liquidity, overall financial success is enhanced. Research recommends firms set suitable leverage ratios such as debt ratio necessary for monitoring firms closely with an objective of ensuring firms remain within the range of acceptable risk tolerance. Further, firms need to develop a robust liquidity management policy to aid in the management of liquidity problems. This entails establishment of receivables management framework to manage firm’s receivable accounts and inventory management to ensure firms maintain adequate levels of inventory to avoid instances of unnecessary inventory shortage.     

Keywords:       financial leverage, financial performance, liquidity, agency theory.