dc.description.abstract |
Firm financial performance is essential for corporate survival and prosperity.
Financial leverage may be used to enhance corporate financial performance, but it can
also occasion financial distress and bankruptcy if not carefully managed. At the
Nairobi Securities Exchange, a number of firms face poor financial performance,
financial distress, and weak governance, commonly associated with excessive
leverage and bankruptcy. Recent corporate finance research show increasing
importance of variables, omitted in prior studies, with more practical significance to
practicing managers including debt slack and corporate governance. In spite of the
profound impact of a firm’s chief executive officer’s influence power on both firm’s
financial leverage and financial performance little has been done to establish the role
of chief executive’s power on the relationship between the two. The purpose of this
study was to determine the moderating effect of Chief Executive Officer Power on the
relationship between financial leverage and financial performance of listed companies
at Nairobi Securities Exchange. The specific objectives of this study were to
determine the effect of: Debt, Debt-Equity ratios, and interest coverage on firm
financial performance and to determine the conditional effect of Chief Executive
Officer Power on the relationship between Debt, Debt-Equity ratios and interest
coverage on firm financial performance. The study was grounded on dynamic
tradeoff, pecking order, agency and upper echelon theories. Positivist research
paradigm with explanatory design using linear regression model on panel data
obtained from a survey of 38 listed companies at Nairobi Securities Exchange over
the period 2010 to 2019 was used. The data was mined from financial statements filed
at the Nairobi Securities Exchange. Controlling for Firm size, Sales growth and
operational efficiency, the study found Debt ratio (ꞵ = .006; p= 0.755) and Chief
Executive Officer Power (ꞵ= .060, p= 0.008) positively related to Return on Equity;
the latter statistically significant at 0.05. Further, Interest coverage ratio (ꞵ=-.022; p=
0.335) and Debt Equity ratio (ꞵ=-.235, p= 0.000) were negatively related to Return on
Equity with the latter statistically significant at 0.05. Chief Executive Officer Power
was found to significantly moderate the relationship between Debt/Equity ratio and
Return on Equity(∆R2 = +0.150; ꞵ = .103, p=0.000 ) with scope for lower levels
enhancing Return On Equity while dampening at higher levels, but insignificant for
Debt ratio(∆R2 = +0.009; ꞵ=.0028859, p=0.694), and Interest cover(∆R
2 = +0.001;
ꞵ= -.008, p= 0.538). The study concluded that while interest bearing long-term debt
was characteristic under-utilized by firms at Nairobi Securities Exchange, it was the
reverse for total and by extension short-term debt. Further, Chief Executive Officer
Power had significant conditional effect on firm financial performance: higher levels
attenuating while lower levels dampening negative relationship between financial
leverage and firm financial performance. The researcher therefore recommended low
Chief Executive Officer Power configuration mandate, judicious uptake of long-term
and reduction of short-term debt to enhance Return on Equity. The study contributes
to knowledge by developing a tool for measurement of Executive power; to policy by
providing empirical evidence for regulation of executive power and to theory
development by introducing executive power contingency to theories relating
financial leverage to firm financial performance. |
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