Effects of financial leverage on stock returns of non-financial companies listed in the Nairobi Securities Exchange
Tangut, Juliet Chelagat
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The aim of this study was to find out the effects of financial leverage on stock returns of non-financial firms listed on the Nairobi Stock Exchange. Secondary and primary data was used for analysis. Financial statements and reports of the listed firms was the source of the secondary data and questionnaires were used to collect primary data for analysis. Panel data pertaining over the period 2002-2016 and STATA statistical software was used to perform the panel regression analysis. Actual stock returns and leverage figures in form of debt ratio, debt equity ratio and firm characteristics of size and growth are used in the calculations. The results indicate the variables debt ratio and debt equity ratio are significant determinants of stock returns for the firms under consideration but negatively affect returns. This implied that the more debt the firms used as a source of finance they experienced low returns on stock. The study also found the relationship between Size and stock returns to be positive and significant affected the investor’s returns on stock. The results concludes, in contrast with a majority of fundamental theories, that there is a negative relationship between leverage and stock returns which indicate that investors are not being compensated for the extra risk they are taking on when investing with high-leveraged firms. Several previous empirical studies has come to the same conclusion. The findings also revealed that most investment managers considers a company’s debt ratio and debt equity ratio before investing on their stock and size of a firm as a very significant factor in deciding on their investments. As the scope of study is limited to the non-financial firms and the sample size is small, the findings of the study must be interpreted with caution and the results may not be generalized for all listed firms. These findings should be of interest to investment managers and policy makers on decisions regarding stock investments on the NSE.