The Impact of Capital Structure Choice on Financial Performance of Listed Banks in The Nairobi Securities Exchange
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Date
2013-05
Authors
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Publisher
Daystar University, School of Business and Economics
Abstract
This study investigated the impact of capital structure choice on performance of listed banks in Kenya. Capital structure theories predict that leverage level influences a firm’s performance. The objectives of this study were to ascertain the level of gearing and to establish the link between capital structure choice and financial performance of the listed banks in Kenya. The population of the study comprised of the 10 listed banks as at December 2012.The main sources of data were the annual Financial and income statements of the listed banks. From the financial and income statements data covering five-year period from 2008 to 2012 was summarized and analyzed using ratios, descriptive statistics, and correlation and regression analysis. The regression models used considered financial performance as the dependent variable and was measured in terms of earnings per share, return on assets, return on capital employed and cost income ratio. The independent variable in the regression model was total debt as a ratio of totals assets while core capital and total capital were also used as control variables. The findings showed that most of the listed banks employed high leverage. Also, correlation and regression was used to establish the association between the variables. The result of the research explains a positive relationship between earnings per share and return on capital employed with debt while return on assets and cost income ratios have a negative correlation with debt. The study concluded that there is a link between capital structure choice and financial performance of the listed banks and it is therefore necessary for the banks to choose a capital structure with an appropriate mix of debt and equity. The study recommends that the listed banks should try to operate below the gearing point so as to increase their value and also try and keep the cost income ratio at the lowest levels so as to maximize profitability.
Description
MASTER OF BUSINESS ADMINISTRATION
IN FINANCE
Keywords
Nairobi Securities Exchange, capital structure choice, banks in Kenya
Citation
Mathe, A. R., (2013). The Impact of Capital Structure Choice on Financial Performance of Listed Banks in The Nairobi Securities Exchange. Daystar University, School of Business and Economics