Abstract:
Globally, scholars and shareholders have been concerned with the financial
performance of listed firms. However, extensive literature indicates mixed and
inconclusive findings on relationships between financial leverage ratios and financial
performance. Informed by the pecking order theory, agency theory, and tradeoff
theory, this study sought to examine whether cash holding moderates the relationship
between financial leverage and financial performance among firms listed in Nairobi
Securities Exchange. To establish the causal relationship among variables, the study
adopted an explanatory research design, while the nature of data collected informed
the choice of a longitudinal research design. A total of 67 firms listed in the NSE as at
2020 constituted the population of the study. An inclusion and exclusion criteria was
adopted where firms that did not trade in the NSE during the study period were
excluded from the study. Additionally, firms with incomplete data and those that did
not provide relevant data required for the study were also excluded leading to a survey
of the remaining 39 firms. Secondary data was extracted from the audited annual
financial reports for 10 years (2011-2020) where descriptive and inferential statistics
were used to manipulate these data. The results of the Hausman test (β =0.0929,
p>0.05) substantiated the choice of random effect. From analysis, the study found
debt to equity ratio (β=- 0.0070,p<0.05), debt to capital ratio (β = -0.1052, p< 0.05)
had a significant negative effect on financial performance. Interest coverage ratio (β =
0.0038, p <0.05), however, had a significant positive effect on financial performance
(ROA) of listed firms in Kenya. Additionally, using hierarchical regression models
the study established a moderating role of cash holding and debt to equity (β=
0.19679,p<0.05), debt to capital (β= 0.14919,p<0.05), and interest coverage ratio(β=-
0.0485,p<0.05), this was supported by a significant change in R-sq value from 0.2404
on the first interaction to 0.2441 on the final interaction. Therefore, the study
recommended that managers and policy formulators maintain low levels of debt to
equity and debt to capital ratios. However, higher levels of interest coverage ratios
should be maintained as it improves financial performance. Additionally, managers
are encouraged to maintain high cash levels in cases where a firm is highly levered.
