Relationship Between Cost Of Capital Components And Financial Performance Of Firms Listed In Nairobi Securities Exchange (N.S.E), Kenya. A Focus On Firm Size

Abstract

Cost of capital is one of the critical components in the financial performance of firms listed in NSE. Firms listed in NSE have not been able to appropriately choose the right mix of cost of capital, this has negatively affected their financial performance, and hence there is a need to ascertain the relationship between cost of capital components and financial performance of firms listed in Nairobi Securities Exchange (NSE), Kenya. The specific objectives of the study was to determine the relationship between cost of debt and financial performance of firms listed in NSE, Kenya, to establish the relationship between cost of equity and financial performance of firms listed in NSE, Kenya, to assess the relationship between the cost of cost of capital reserves and financial performance of firms listed in NSE, Kenya, to determine the relationship between the cost of preference shares and financial performance of listed firms in NSE, Kenya and to determine the moderating role of firm size on the relationship between cost of capital components and financial performance of listed firms in NSE, Kenya. The study was informed by pecking order theory, modern portfolio theory, trade-off theory, the net income approach theory signaling and liquidity risk theory. The study adopted descriptive research design. The unit of observation was companies Listed in NSE (NSE). According to NSE there are 64 listed companies. The study purposively selected manufacturing firms that are listed at NSE. According to NSE there are 8 manufacturing firms that are listed at NSE. The researcher collected secondary data from the audited annual financial reports of 8 manufacturing firms listed in NSE. The study used data collection sheet to assist in data collection. Descriptive and inferential analysis was used in data analysis. The findings indicated that there existed a moderate positive significant relationship between costs of debt and financial performance of manufacturing firms listed in NSE. The study further revealed that there was a statistically significant relationship between the cost of equity and financial performance of manufacturing firms listed in NSE. Further the study revealed that there exist statistically significant relationship between cost of capital reserves and financial performance of manufacturing firms listed in NSE.The study found out there is insigficant relationship between the cost of preference and financial performance of listed firms in NSE. Finally, the study revealed that the moderating role of firm size had statistical significant effect on how cost of capital components other than preference capital and financial performance of manufacturing firms listed in NSE related. The study concluded that most manufacturing firms listed in Nairobi security exchange relied on debts for 2012-2018 period this is attributed to the gradual increase in the overall debt. Further, the study concluded that there is a significance level of relationship between cost of equity and financial performance of manufacturing firms listed in Kenya. From the conclusion the study recommended that manufacturing firms listed in NSE should use debt and equity financing since it positively influence the financial performance.