THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF FIRMS LISTED ON THE NAIROBI SECURITIES EXCHANGE

Abstract

Until now, researchers are not in consensus, whether it is the capital structure that influences performance or performance that influences capital structure or both. The main objective of this study was to establish the relationship between capital structure and financial performance of firms listed on the NSE by employing a generalised linear model (GLM) as an improvement on ordinary least regression (OLS). The results of the study revealed that efficient and profitable firms employ more debt than comparable firms that are less profitable possibly because profitable firms’ exposure to financial risk is low. There results also indicate that firms that use more debt outperformed those that use less debt. Keyterms: Capital Structure; Financial Performance; General Linear Model; Ordinary Least Regression; NSE *Department of Accounting and Finance, University of Nairobi, PO Box 30197, NAIROBI, KENYA **Department of Finance, Risk Management and Banking, School of Management Sciences, PO Box 392, UNISA, 0003, Preller Street, Muckleneuk Ridge, Pretoria