You have done the complete research yet we only needed to do up to chapter three only. Remove chapter four and five. Justify your text, number your sections and subsections. Do not indent inside the first sentence of your paragraphs, let them start at the

THE RELATIONSHIP BETWEEN CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF BANKS LISTED AT THE NAIROBI SECURITIES EXCHANGE

BY

ALLAN A LUSENJI

BCM/B/04-56702/2016

A RESEARCH REPORT SUBMITTED TO MASINDE MULIRO UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF THE AWARD OF A DEGREE OF BACHELOR OF COMMERCE AT MASINDE MULIRO UNIVERSITY

MAY 2018

DECLARATION – new page

This research project is my original work and has not been presented to any other institution or

University

Sign_________________ Date ______________

ALLAN A LUSENJI

BCM/B/04-56702/2016

This research project has been submitted for examination with our approval as the university supervisor.

Sign_________________ Date _______________

MR: ELKANA KIMELI

Lecturer

School of Business, MASINDE MULIRO UNIVERSITY

Contents – how about the preliminary pages?

2 CHAPTER ONE: INTRODUCTION

2 Background of the Study

3 Capital Structure

3 Financial Performance

4 Relationship between Capital Structure and Financial Performance

5 Nairobi securities exchange

6 Statement of the problem

8 Objective of the Study

8 Research questions

8 Significance of Research

10 CHAPTER TWO: LITERATURE REVIEW

10 Introduction

10 Components of capital structure

11 Theoretical Literature Review

11 Capital Structure Theory

13 Market timing

13 Determinants of capital structure

14 Growth

14 Age of the firm

14 Firm size

14 Firm’s profitability

14 Asset base

14 Empirical Review

16 CHAPTER THREE: RESEARCH METHODOLOGY

16 Introduction

16 Research Design

16 Target Population

16 Data Collection

17 Data Analysis

17 Analytical Model

17 Test of Significance

19 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION

19 Introduction

19 Regression Analysis

27 Interpretation of the Findings

29 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

29 Introduction

29 Summary

29 Conclusion

30 Recommendations for Policy

31 REFERENCES

CHAPTER ONE: INTRODUCTION

1.0 Introduction

This chapter provides the background information about relationship between capital structure and financial performance of banks, the problem statement, objectives of the study, research questions, significance of the study and the scope of the study.

1.1 Background of the Study

Capital refers to structure as the way in which a firm finances its operations which can either be through debt or equity capital or a combination of both. Financial Performance is the blue print of the financial affairs of a concern and it reveals the organization’s ability to translate its financial resources into mission related activities (Brigham, & Houston, 2005). The importance of financing decisions cannot be over emphasized since many of the factors that contribute to business failure can be addressed using strategies and financial decisions that drive growth and the achievement of organizational objectives. The finance factor is the main cause of financial distress. Financing decisions result in a given capital structure and suboptimal financing decisions can lead to firm’s failure (Abor, 2007). A great dilemma for management and investors alike is whether there exists an optimal capital structure. The objective of all financing decisions is wealth maximization and the immediate way of measuring the quality of any financing decision is to examine the effect of such a decision on the firm’s performance.

High performance is more than high returns. It is the ability to generate high returns for the level of risk assumed by a firm. Credit risk, liquidity risk, market risk and so on are some of the risks firms assume in order to earn optimal returns. High performing institutions are those that manage and control their risk the best by employing effective trade-off between risk and returns. Firms are constantly looking for ways to achieve high performance and therefore a lot of theories have been formulated and studies conducted by firms in efforts to determine the factors that influence performance of firms (Abor, 2007). A set of these theories and studies identify capital structure as one of the factors affecting a firm’s performance on one hand and on the other hand these theories and studies contradict the view that Capital structure does affect a firm’s performance arguing that capital structure is irrelevant to a firm’s performance (Hamilton, 2010). The capital structure of a firm is basically the way a firm finances its assets through some combination of debt and equity that a firm deems as appropriate to enhance its operations.

Capital Structure – number your subsections

A firm’s capital structure refers to the way a firm finances its assets though equity, debt or a combination of both. As financial capital is an uncertain but critical resource for all firms, suppliers of finance are able to exert control over firms. Debt and equity are the two major classes, with debt holders and equity holders representing the two types of investors in the firm. Each of these is associated with different levels of risk, benefits, and control. It is the way the corporation finances its assets through some combination of equity, debt, or hybrid securities (Holmes, 2003). A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity is instrumental in determining the capital structure of a firm.

The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. According to Hovakimian, Hovakimian, & Tehranian, 2004) , the Consensus is that “leverage increase with fixed assets, non-debt tax shields, investment Opportunities, and firm size, and decreases with volatility, advertising expenditure, the probability Of bankruptcy, profitability, and uniqueness of the product.” Block, & McMillan, (2005) state that Asset structure; non-debt tax shields, growth, uniqueness, industry classification, size, earnings Volatility and profitability are factors that may affect leverage according to different theories of Capital structure. Still, other authors such as Abor, (2007) may provide another set of potential determinants of capital Structure.

Financial Performance – number subsections

A firm’s financial performance, in the view of the shareholder, is measured by how better off the shareholder is at the end of a period, than he was at the beginning and this can be determined using ratios derived from financial statements; mainly the balance sheet and income statement, or using data on stock market prices (Hutchinson, 1995). These ratios give an indication of whether the firm is achieving the owners’ objectives of making them wealthier, and can be used to compare a firm’s ratios with other firms or to find trends of performance over time. Abor (2007) states that adequate performance measure ought to give an account of all the consequences of investments on the wealth of shareholders. The main objective of shareholders in investing in a business is to increase their wealth. Thus the measurement of performance of the business must give an indication of how wealthier the shareholder, has become as a result of the investment over a specific time.

The limitations on financial statements in explaining firm value underline the fact that the source of economic value is no longer the production of material goods, but the creation of intellectual capital. Intellectual capital includes human capital and structural capital wrapped up in customers, processes, databases, brands, and systems, and has been playing an increasingly important role in creating corporate sustainable competitive advantages. The use of financial ratios for business analysis is common, and hence, almost cliché. Ratio analysis techniques can be considered a business analysis paradigm as an established point of view (Jensen, 2006). Considering these facts, encouraging industry operators to apply the techniques of ratio analysis to assess their performance requires a simple framework that compresses a large amount of data into a small set of performance indicators. These performance indicators must include intangible, non-financial elements that are often critically important to operators.

The firm’s debt ratio is the proportion of the firm’s debt in relation to the total equity finance in the company’s capital structure. This key ratio is famously known as an indicator of the company’s long term solvency position and 8 also indicator of the financial risk position of the company. It’s obtained by dividing the total company debt with the total shareholders’ funds. Gross profit is the difference between revenue and cost of goods sold. Gross Margin is the ratio of gross profit to revenue (Abor, 2007). Depends on situation or decision analyzed both or one of these two performance indicators can be more suitable. For merchandising decisions in company with large assortment of products gross profit expressed in money terms needs to be used when measuring financial result on the level of all product assortments or on the level of big product group Brigham, & Houston, (2005). This allows seeing what the overall financial result without digging into details is.

Relationship between Capital Structure and Financial Performance

Fischer, Heinkel, & Zechner, (2009) in their scholarly works argued that, financial leverage had a positive effect on the firm’s return on equity provided that earnings’ power of the firm’s assets exceeds the average interest cost of debt to the firm. Brigham, & Houston, (2005) also found significantly positive relationship between debt ratio and measures of profitability. Chen, (2004) also identified positive association between debt and profitability but for industries.

In his study of leveraged buyouts, Donaldson, (2005) established a significantly positive relation between profitability and total debt as a percentage of the total buyout-financing package. However, some studies have shown that debt has a negative effect on firm profitability. Brigham, & Houston, (2005), for instance argue that the use of excessive debt creates agency problems among shareholders and creditors and that could result in negative relationship between leverage and profitability. Abor, (2007) found in their Indian study that leverage has a negative effect on performance. In another study, Fischer, Heinkel, & Zechner, (2009) examined the relation between capital structure and performance by comparing Polish and Hungarian firms to a large sample of firms in industrialized countries (Kitaka, 2013). He used panel data analysis to investigate the relation between total debt and performance as well as between different sources of debt namely, bank loans, and trade credits and firms’ performance measured by profitability (Abor, 2007). His results show a significant and negative effect for most countries. He found that the type of debt, bank loans or trade credit is not of major importance, what matters is debt in general.

Nairobi securities exchange – number subsections

The Nairobi Securities Exchange, which was formed in 1954 as a voluntary organization of stockbrokers, is now one of the most active capital markets in Africa. The administration of the Nairobi Securities Exchange is located on Tosica five storey building located at Westlands road Nairobi (Hall, Hutchinson, & Michaelas, 2008). As a capital market institution, the Nairobi Securities Exchange plays an important role in the process of economic development. It helps mobilize domestic savings thereby bringing about the reallocation of financial resources from dormant to active agents (Fischer, Heinkel, & Zechner, 2009) Long-term investments are made liquid, as the transfer of securities between shareholders is facilitated.

The Nairobi Securities Exchange has also enabled banks to engage local participation in their equity, thereby giving Kenyans a chance to own shares. Banks can also raise extra finance essential for expansion and development. To raise funds, a new issuer (bank) publishes a prospectus, which gives all pertinent particulars about the operations and future prospects and states the price of the issue. Nairobi Securities Exchange also enhances the inflow of international capital (Abor, 2007). They can also be useful tools for privatization programmes. It is generally accepted that banks declaring stock distributions of 25 per cent or greater consider them as stock splits which, therefore, have no effect on retained earnings. Stock distributions of less than 25 per cent are considered as stock dividends that reduce the retained earnings account.

In Kenya, the establishment and licensing of Investment Companies is done by the Capital Markets Authority (CMA). These firms are registered as Collective Investment Schemes (CIS) each mandated to operate investment based on the license granted. Kenya represents over 50% of the economic power of the East African countries, with the most active securities exchange, Nairobi Securities Exchange (Kennerley 2002). Even with the growth in the number of investment firms, the uptake of these investment opportunities has been wanting. The volume of funds channeled to funds in comparison to other securities, questions the knowledge of the operations of funds, investor confidence and knowledge of the different investment vehicles available. The listed collective schemes are managed by investment companies. In Kenya there are three investment companies listed in the Nairobi Securities Exchange (Abor, 2007). This indicates that such investments are professionally managed and the returns derived should mimic the market trends. The Investment companies listed at are Centum Investment, Olympia Capital Holdings and Trans Century Ltd.

The three investment firms are considered among the largest listed Investment Companies in the East African region and together with their subsidiaries are engaged in the business of investment across private equity, construction industry and infrastructure and quoted private equity asset classes. The Nairobi Securities Exchange has also enabled the investment companies to engage local participation in their equity, thereby giving Kenyans a chance to own shares (Abor, 2007). Companies can also raise extra finance essential for expansion and development. To raise funds, a new issuer publishes a prospectus, which gives all pertinent particulars about the operations and future prospects and states the price of the issue. NSE also enhances the inflow of international capital. They can also be useful tools for privatization programmes. It is generally accepted that investment firms declaring stock distributions of 25 per cent or greater consider them as stock splits which, therefore, have no effect on retained earnings. Stock distributions of less than 25 per cent are considered as stock dividends that reduce the retained earnings account (Kennerley, 2002).

1.2 Statement of the problem

A bank’s capital structure refers to the mix of its financial liabilities. It has long been an important issue from the strategic management standpoint since it is linked with a firm’s ability to meet the demands of various stakeholders (Brigham, & Houston, 2005). Debt and equity are the two major classes of liabilities, with debt holders and equity holders representing the two types of investors in the bank. Each of these is associated with different levels of risk, benefits, and control. While debt holders exert lower control, they earn a fixed rate of return and are protected by contractual obligations with respect to their investment. Equity holders are the residual claimants, bearing most of the risk and have greater control over decisions (Gachoka, 2005).

An appropriate capital structure is a critical decision for any business organization. The decision is important not only because of the need to maximize returns to various organizational constituencies, but also because of the impact such a decision have on an organization’s ability to deal with its competitive environment. Following the work of Abor, (2007), much research has been carried out in corporate finance to determine the influence of a business’s choice of capital structure on performance. The difficulty facing companies when structuring their finance is to determine its impact on performance, as the performance of the business is crucial to the value of the firm and consequently, its survival.

Managers have numerous opportunities to exercise their discretion with respect to capital structure decisions. The capital structure employed may not be meant for value maximization of the firm but for protection of the manager’s interest especially in organizations where corporate decisions are dictated by managers and shares of the company closely held (Brigham, & Houston, 2005). Even where shares are not closely held, owners of equity are generally large in number and an average shareholder controls a minute proportion of the shares of the firm. This gives rise to the tendency for such a shareholder to take less interest in the monitoring of managers who left to themselves pursue interest different from owners of equity.

In the past three years in Kenyan market in general, there is a significant reduction in the interest rate but it has not made any deference in the cost of borrowing. Try looking for any write ups. 2011 in particular the cost of funds increased significantly in the Kenyan debt market, this was as result of inflation that triggered monetary policy committee to increase the interest rates in the banking industry that spilled to the borrowers. The cost of funds thus affected bank’s financial performance, increased prices of real estate properties. There are a number of studies that have been done on capital structure and financial performance ; Gachoki, (2005) effect of capital structure change on share prices for firm quoted at the NSE, (Brigham, & Houston, 2005) the relationship between capital structure & profitability of micro finance institutions in Kenya; Gachoki, B. (2005) the relationship between capital structure and financial performance of SMEs in Nairobi, (Abor, 2007), a test of relationship between capital structure and agency costs. Findings appear to suggest that there is a significant impact of capital structure on company performance after controlling for company specific characteristics such as company size, non-duality, leverage and growth. The finding is of significant for investors and policy marker which will serve as a guiding for better investment decision. No study has been done on the relationship between capital structure and financial performance on listed banks in Nairobi security exchange. This study therefore seeks to fill in this gap by investigating capital structure on financial performance with specific reference to listed banks in Nairobi security exchange.

Objective of the Study

The focus of this study is to establish the relationship between Capital Structure and Performance of the banks listed at the Nairobi securities exchange. The following specific objectives will guide the study:

i. To determine the effect of debt financing to the return on capital equity.

ii. To determine the effect of shareholder’s equity on financial performance

Research questions

i. The following research questions in relation to listed banks in Kenya will be a guide to the research:

ii. To what extent does capital structure affect on the bank’s financial performance?

iii. How does debt influence financial performance?

iv. How does shareholder’s equity influence financial performance

Significance of Research

The findings of this study will benefit Investors in the listed investment firms, shareholders of the listed investment firms, academicians and financial researchers and the management of investment firms.

The more the knowledge about a phenomena one has the better equipped they are to face the challenges of the future. Effects of capital structure, how it is affected by a firms return and how a change on it can affect the firm’s value will be a welcome weapon to facing the challenges of better management, capital appreciation and shareholder wealth maximization.

Current and prospective investors in these firms will be able to understand better the capital structure of the firms they have invested in or seek to invest in and its impact on the firm’s financial performance, how its change impacts on the firm’s value and if the firms return can cause it to change its capital structure and what the consequences of such a choice would be. This will further inform their investment decisions lowering the risks of investing blindly. The researcher hopes that the findings from the study shall be useful to the business community since it will throw more light on the role that capital structure has in determining financial performance.

Shareholders will understand more about the capital structure, firm’s value and firm’s returns and how they are related and in turn affect each other. This will help them in making informed decisions at the Annual General Meetings while being faced with issues of capital structure changes and firms value determination.

Capital structure is a wide study where a lot of research had been done. Yet, there is no empirical evidence that it has been exhaustively covered and that all options that relate to it have been researched and reviewed. Thus, additional information based on concrete evidence will be a welcome additive to the existing scope of knowledge.

CHAPTER TWO: LITERATURE REVIEW

Introduction

This chapter examines the literature relevant to the study. It follows the conceptual framework, incorporate scholarly works and theories. The rationale of the study is to ascertain the role capital structure plays in determining financial performance. The literature under review was obtained from journal articles, websites and text.

Components of capital structure

Different firms have different capital structures. Firms have an option of either equity or debt to finance their assets. Gachoka, (2005) argues that businesses have only two options in which they can raise money; either through debt or equity. However, Brigham, & Houston, (2005) concluded that the choice between equity and debt financing options has no effect on the overall value of the firm. The debt component in the capital structure consist borrowed funds which include both short-term and long-term debts (Kitaka, 2013). Debt is the aggregate of all interest bearing liabilities of a firm, long term as well as short term. Use of debt in a firm always leads to agency costs (Block, & McMillan, 2005). A firm would maximize its value if its assets are fully financed by debt where interest on debt is tax allowable. However, if interest on debt is not tax allowable, the owners of the firm may be indifferent whether to use debt or equity, Abor, 2007) argues that where debt is used as a financing option, the creditors are paid back their principal amount and interest on debt which is fixed amounts according to the contract between the lender and the borrower.

Failure to pay principal amount and interest may lead to legal actions by the firm’s creditors (Brigham, & Houston, 2005). Increased debt financing leads to increase in fixed legal payments to creditors in form of principal and interest which may lead to liquidity problems making the firm unable to effectively pay principal and interest when due. However, increased debt in the capital structure of a firm may lead to increased value of the firm due to tax benefits, Abor, (2007) argues that to reduce the risk associated with debt, the firm may opt for equity as a source of finance more than debt financing to finance expected investment opportunities that are likely to spur growth opportunities. This will positively reflect on the performance of the firm. On the other hand, equity component includes common stock, preferred stock and other reserves including retained earnings. In equity financing, the firm is not under obligation to distribute its earnings to shareholders.

Though the firm may opt to pay dividends or repurchase back its shares from the shareholders, the firm is under no obligation (Gachoka 2005). Firms that finance their investments using equity finance are more profitable than those firms that prefer borrowed funds to finance investments. (Block, & McMillan, 2005) argues that a firm must endeavor to achieve the optimal capital structure or the best mix of financing in order to maximize profitability, return on investments, and increase its value as well as reduce the overall cost of capital. A firm’s cost of capital is a function of its capital structure. Abor, (2007) argued that the choice of optimal capital structure would reduce the cost of capital and increase the shareholder’s wealth. The optimal capital structure is the mix of various components that yields the highest value of the firm.

Theoretical Literature Review

Theoretical literature review in this study will highlight the major capital structure theories. Capital structure theories were started by David 1979 when they wrote a paper on capital structure irrelevance theory from which other theories have emerged. Most of the research work done in capital structure has been conducted with data from developed countries (Block, & McMillan, 2005)

Capital Structure Theory

Capital structure puts into perspective the way in which a firm finances its operations. Apparently, this can either be through debt or equity capital or a combination of both David (1979). Capital structure theory as attributed to Modigliani and Miller concluded that it doesn’t matter how a firm finances its’ operations and that the value of a firm is independent of its’ capital structure making capital structure irrelevant. The study was based on the assumption that there were no brokerage costs, earnings before interest and tax were not affected by the use of debt and that investors could borrow at the same rate as corporations and lastly there was no information asymmetry. Although this statement didn’t reject the possible preference of a firm’s owner to a certain type of financing over others, it did affect the irrelevance of the value of the firm to the means of financing it given a perfect market (Abor, 2007). A number of theories were from then onward advanced to explain capital structure notable among which are the pecking order theory and trade off theory which have been often than not a centre of debate.

Modigliani-Miller Theory (1958)

The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle. The theorem was originally proven under the assumption of no taxes. It is made up of two propositions which can also be extended to a situation with taxes (Abor, 2007). Consider two firms which are identical except for their financial structures. The first (Firm U) is unlevered that is, it is financed by equity only. The other (Firm L) is levered: it is financed partly by equity, and partly by debt. The Modigliani Miller theorem states that the value of the two firms is the same.

Agency Costs Theory

There are three types of agency costs which can help explain the relevance of capital structure. Asset substitution effect: As Debt to Equity ratio increases, management has an increased incentive to undertake risky (even negative NPV) projects. This is because if the project is successful, share holders get all the upside, whereas if it is unsuccessful, debt holders get all the downside. If the projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from debt holders to share holders. Underinvestment problem: If debt is risky (e.g. in a growth company), the gain from the project will accrue to debt holders rather than shareholders. Thus, management has an incentive to reject positive NPV projects, even though they have the potential to increase firm value. Free cash flow: unless free cash flow is given back to investors, management has an incentive to destroy firm value through empire building and perks etc. Increasing leverage imposes financial discipline.

Pecking Order Theory of capital structure

The pecking order theory as developed by Myers (1984) stated that firms prefer internal sources of finance; they adapt their target dividend payout ratios to their investment opportunities although dividends and payout ratios are gradually adjusted to shifts in the extent of valuable investment opportunities. In addition, Myers (1984) stated that in the event that external finance is required, firms are most likely to issue the safest security first that is to say they start with debt then possibly convertible debt then equity comes as last resort. In summary, Myers’ argument was such that businesses adhere to a hierarchy of financing sources and prefer internal financing when available. Should external financing be required, debt would be preferred over equity. Pandey (2005) also concurred with Myers’ argument when he noted that managers always preferred to use internal finance and would only resort to issuing shares as a last resort. He went on to add that the pecking order theory was able to explain the negative inverse relationship between profitability and debt ratio within an industry however; the theory did not fully explain the capital structure differences between industries. Scherr et al (1993); Holmes et al (1991) and Quan (2002) considered the pecking order theory as an appropriate description of Medium Sized Enterprises’ financing practices because debt is by far the largest source of financing and that small and medium enterprise managers tend to be owners of the business who do not normally want to dilute their ownership. In addition, they concurred that firms consequently tend to prefer internal financing to external financing of any sort and if they must obtain external funding, they have a preference of debt over equity. They also noted that the order of preference reflected the relative costs of various financing options. Firms therefore would prefer internal sources of finance as compared to expensive or costly external finance and that firms that are profitable and therefore generate earnings are expected to use less debt than those that do not generate high earnings. Cosh & Hughes (1994) on the other hand argued that within the overall pecking order theory, Small and Medium Sized Enterprises’ when compared to large enterprises would depend more on holding excess liquid assets to meet discontinuities in investment programs, depend more on short term debt including trade credit and overdrafts, rely to a greater extent on hire purchase and leasing equipment. Therefore in relation to Small Medium Enterprises financing, Cosh & Hughes (1994) proposed a refinement of the theory due to its lack of information to assess risk both on individual and collective basis.

Market timing

The theory holds that a firm time the market and will issue new shares overpriced equity, Baker and Wurgler (2002). A firm will issue shares when the market price is higher than book value and repurchase its shares back when market value is lower than book value. This helps the firm generate funds to finance its operations. The theory holds that firms will prefer external equity when cost of equity is low, but when cost of equity is high, the firm will prefer debt.

Determinants of capital structure

There are several determinants of capital structure of a firm which influences its financing decisions (SOURCE). They include firm’s profitability, firm age, firm size, firm’s growth opportunities, and asset base; they were identified as determinants of capital structure by Block, & McMillan, (2005) in their study on French and Greek firms.

Growth

Growth opportunities have been proven in many studies as an important determinant of capital structure and thus affects firm’s performance. Growth opportunity influences the nature and the components of the capital structure, firms with high growth opportunities are mostly likely to suffer from debt problems causing liquidity risks and other risks associated with debt. Growth and expansion prompts the firm to borrow, Bhaduri (2002), concluded that growth of the firm may affect the relationship between capital structure and firm’s financial performance.

Age of the firm

Age of the firm helps determine its capital structure. A firm’s going concern principle is established over time making it increase its ability to secure more debt. New firms may be unable to acquire long term debt; financiers may not know a new firm's credit worthiness, therefore old firms can access debt more than new firms. Gachoka, (2005) confirmed in their study that age of a firm has a positive relationship with long term debt. However, Block, & McMillan, (2005) argued that age of a firm has a negative relationship with debt.

Firm size

Size of a firm is an important determinant of capital structure; smaller firms are more likely to use equity finance while larger firms are more likely to use debt financing. Size of the firm has a positive relationship long term debt but negative relationship with short term debt (Bhaduri, 2002).

Firm’s profitability

Profitable firms may lead to high retention prompting a firm to rely on internal financing only. Block & Mc Milan (2005) concluded that retained earnings form a core source of financing.

Asset base

Assets are normally required as collateral to secure loans by lenders. Firms with large asset base are likely to secure debt at a lower rate if such debts are secured on firm’s assets. Bhaduri, (2002) found a positive relationship between firm’s assets and debt

Empirical Review

This section reviews the study variable as studied by other scholars in other parts of world. The findings helped to compare their findings and the current study findings. The section presents contains both the international evidence and the local evidence.

Empirical supports for the relationship between capital structure and firm performance from the agency perspective are many and in support of negative relationship (Brigham, & Houston, 2005) also confirms negative relationship between financial leverage and performance. Their results further suggest that liquidity, age and capital intensity have significant influences on financial performance. Many determinants of the corporate capital structure were nominated and empirically examined in the US.

Block, & McMillan, (2005) discusses role of managerial self-interest in making capital structure decisions. They find that there exist negative relationship between leverage ratio and management’s shareholding. This indicates that in the absence of any outsider principal stockholder the tendency of low debt to equity ratio will continue which will lead to higher non diversifiable risk of debt to management. Bhaduri, (2002), observed that the financial leverage of firms is positively related to a firm’s profitability. Given that a firm must seek an outside source of funds, its choice between debt and equity will depend in part on the magnitude of potential agency costs of debt.

CHAPTER THREE: RESEARCH METHODOLOGY

Introduction

This chapter sets out various stages and phases that were followed in completing the study. It involves a blueprint used for the collection, measurement and analysis of data. The research identified the procedures and techniques that were used in the collection, processing and analysis of data. Specifically the following subsections of research methodology were included; research design, target population, sample, data collection instruments and procedures and finally data analysis.

Research Design

A descriptive survey research design was employed in this study. Descriptive research is the investigation in which quantitative data is collected and analyzed in order to describe the specific phenomenon in its current trends, current events and linkages between different factors at the current time. Descriptive research design has been chosen because it will enable the researcher to generalize the findings to a larger population. Kyereboah -Coleman (2007) and Bogan (2008) used similar designs successfully in their studies on performance of firms listed in the stock exchange in Ghana and across six continents respectively.

Target Population

The target population of the study comprised of the three investment companies which were listed under the investment sector of the market segment of the Nairobi Securities Exchange (NSE) as at June 2014 (Appendix I). A census approach method was used in the study where the three companies were selected without sampling.

Data Collection

The study utilized panel data which consist of time series and cross-sections. The data for all the variables in the study were extracted from published reports and financial statements of the listed investment companies in the NSE covering the years 2010 to 2013 where quarterly reports were used. Earning data were obtained from the NSE hand books for the period of reference. The Secondary Data which include size of the firm, total debt, and long-term debt were extracted from the income statement, statement of financial position, and notes to the accounts using a document review guide.

Data Analysis

This study used Statistical Package for Social Science (SPSS Version 20.0) program. The study being descriptive in nature, the quantitative method of data analysis and inferential analysis were used as analysis techniques. The data collected was run through various models so as to clearly bring out the effect of change in capital structure on firms financial performance.

Analytical Model

Panel data Methodology was used which involved pooling of observation on the firms over several times periods. A general model for panel data that allowed the study to be estimated using panel data with great flexibility and formulate the difference in the behavior of the cross- section elements was adopted. The relationship between debt and profitability performance was estimated using the following regression model:

ROEit = β1+ β2LDAit +β3DAit +β4Sizeit +ei

ROEit is Earning (EBIT) divided by Equity for firm i in time t

LDAit is long-term debt divided by the market value capital of Equity for firm i in time t

DAit is total debt divided by the market value capital of Equity for firm i in time t

Sizeit is natural logarithm of firms’ total assets

ei is the error term

Variable used for the analysis included profitability and leverage ratios. Performance used accounting-based measure; profitability measures as the ration of earnings before interest and taxes (EBIT) to Equity. The leverage ratios used included:

Long-term debt to total capital and

Total debt to total capital

Size was included as control variable.

Test of Significance

The model helped in determining if there was a relationship between capital structure and financial performance of the investment firms. Collected data was subjected to the analysis tools SPSS version 20.0.

The data was collected from the secondary sources and analysis done; the ANOVA test was used to determine the impact independent variables have on the dependent variable in a regression analysis. ANOVA provides a statistical test of whether or not the means of several groups are equal. ANOVAs are useful in comparing (testing) three or more means (groups or variables) for statistical significance.

You were to end here. Chapter 4 and 5 are not needed

CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION

Introduction

This chapter presents the research findings to investigate the relationship between capital structure and financial performance. The study was conducted on investment firms listed at the NSE where secondary quarterly data from the period of 2010 to 2013 was used in the analysis. Regression analysis was used in analysis the data.

Regression Analysis

Year 2010

Table 4.1: Model Summary for 2010

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.886a	.785	.752	.632

Source: Research Findings

Adjusted R squared is coefficient of determination which tell us the variation in the dependent variable due to changes in the independent variable, from the findings in the above table the value of adjusted R squared was 0.752 an indication that there was variation of 75.2% on financial performance of investment companies listed in the NSE due to changes in the independent variables which are long-term debt, total debt and size at 95% confidence interval. This shows that 75.2% of changes in financial performance of investment companies listed in the NSE could be attributed to their long-term debt, total debt and size. R is the correlation coefficient which shows the relationship between the study variables, from the findings shown in the table above there was a strong positive relationship between the study variables as shown by 0.886.

Table 4.2: Coefficients for 2010

	Model	Unstandardized Coefficients	Standardized Coefficients
		B	Std. Error	Beta	t	Sig.
1	Constant	.327	.134		1.227	.000
	Long term debt	.118	.077	.164	1.519	.133
	Total debt	-.198	.099	-.237	- 2.011	.048
	Size	.271	.130	.278	2.083	.040

Source: Research Findings

From the data in the above table the established regression equation for year 2010 was Y = 0.327 + 0.118 LDA - 0.198 DA + 0.270 Size

From the above regression equation it was revealed that holding long term debt, total debt and size of investment companies listed in the NSE to a constant zero the financial performance of investment companies listed in the NSE would stand at 0.327, a unit increase in long term debt would lead to increase in financial performance of investment companies listed in the NSE by a factors of 0.118, unit increase in total debt would lead to decrease in performance of investment companies listed in the NSE by a factor of 0.198, further unit increase in size of the firm would lead to increase in financial performance of investment companies listed in the NSE by a factor 0.270.

Year 2011

Table 4.3 Model Summary for 2011

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.832a	.692	.653	.583

Source: Research Findings

Adjusted R squared is coefficient of determination which tell us the variation in the dependent variable due to changes in the independent variable, from the findings in the above table the value of adjusted R squared was 0.653 an indication that there was variation of 65.3% on financial performance of investment companies listed in the NSE due to changes in the independent variables which are long term debt, total debt and size at 95% CI. This shows that 65.3% of changes in financial performance of investment companies listed in the NSE could be attributed to their long term debt, total debt and size. R is the correlation coefficient which shows the relationship between the study variables, from the findings shown in the table above there was a strong positive relationship between the study variables as shown by 0.832.

Table 4.4 Coefficients for 2011

	Model	Unstandardized Coefficients	Standardized Coefficients
		B	Std. Error	Beta	t	Sig.
1	Constant	.809	.519		1.414	.000
	Long term debt	.012	.049	.026	.256	.799
	Total debt	-.016	.099	-.024	-.166	.868
	Size	.102	.078	.164	1.301	.197

Source: Research Findings

From the data in the above table the established regression equation for year 2011 was Y = 0.809 + 0.012 LDA - 0.016 DA + 0.102 Size

From the above regression equation it was revealed that holding long term debt, total debt and size of investment companies listed in the NSE to a constant zero the financial performance of investment companies listed in the NSE would stand at 0.809, a unit increase in long term debt would lead to increase in financial performance of investment companies listed in the NSE by a factors of 0.012, unit increase in total debt would lead to decrease in performance of investment companies listed in the NSE by a factor of 0.016, further unit increase in size of the firm would lead to increase in financial performance of investment companies listed in the NSE by a factor 0.102.

Year 2012

Table 4.5 Model Summary for 2012

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.757a	.573	.526	.805

Source: Research Findings

Adjusted R squared is coefficient of determination which tell us the variation in the dependent variable due to changes in the independent variable, from the findings in the above table the value of adjusted R squared was 0.526 an indication that there was variation of 52.6% on financial performance of investment companies listed in the NSE due to changes in the independent variables which are long term debt, total debt and size at 95% confidence interval. This shows that 52.7% of changes in financial performance of investment companies listed in the NSE could be attributed to long term debt, total debt and size. R is the correlation coefficient which shows the relationship between the study variables, from the findings shown in the table above there was a strong positive relationship between the study variables as shown by 0.757.

Table 4.6 Coefficients for 2012

	Model	Unstandardized Coefficients	Standardized Coefficients
		B	Std. Error	Beta	t	Sig.
1	Constant	.385	.108		3.944	.348
	Long term debt	.209	.089	.222	2.347	.021
	Total debt	-.069	.095	-.080	-.732	.466
	Size	.134	.097	.135	1.375	.173

Source: Research Findings

From the data in the above table the established regression equation for year 2012 was Y = 0.385 + 0.209 LDA - 0.069DA + 0.134 Size

From the above regression equation it was revealed that holding long term debt, total debt and size of investment companies listed in the NSE to a constant zero the financial performance of investment companies listed in the NSE would stand at 0.385, a unit increase in long term debt would lead to increase in financial performance of investment companies listed in the NSE by a factors of 0.209, unit increase in total debt would lead to decrease in performance of investment companies listed in the NSE by a factor of 0.069, further unit increase in size of the firm would lead to increase in financial performance of investment companies listed in the NSE by a factor 0.134.

Year 2013

Table 4.7 Model Summary for year 2013

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.925a	.855	.815	.535

Source: Research Findings

Adjusted R squared is coefficient of determination which tell us the variation in the dependent variable due to changes in the independent variable, from the findings in the above table the value of adjusted R squared was 0.815 an indication that there was variation of 81.5% on financial performance of investment companies listed in the NSE due to changes in the independent variables which are long term debt, total debt and size at 95% confidence interval. This shows that 81.5% of changes in financial performance of investment companies listed in the NSE could be attributed to long term debt, total debt and size. R is the correlation coefficient which shows the relationship between the study variables, from the findings shown in the table above there was a strong positive relationship between the study variables as shown by 0.925.

Table 4.8 Coefficients for year 2013

	Model	Unstandardized Coefficients	Standardized Coefficients
		B	Std. Error	Beta	t	Sig.
1	Constant	.614	.394		2.098	.000
	Long term debt	.263	.067	.385	3.911	.000
	Total debt	-.111	.056	-.207	- 1.991	.050
	Size	.233	.079	.317	2.940	.004

Source: Research Findings

From the data in the above table the established regression equation for year 2013 was Y = 0.614 + 0.263 LDA - 0.111DA + 0.233 Size. From the above regression equation it was revealed that holding long term debt, total debt and size of investment companies listed in the NSE to a constant zero the financial performance of investment companies listed in the NSE would stand at 0.614, a unit increase in long term debt

would lead to increase in financial performance of investment companies listed in the NSE by a factors of 0.263, unit increase in total debt would lead to decrease in performance of investment companies listed in the NSE by a factor of 0.111, further unit increase in size of the firm would lead to increase in financial performance of investment companies listed in the NSE by a factor 0.233.

Regression Results

A multiple regression analysis was conducted to study the relationship between independent variables and the dependent variable. Regression method is useful for its ability to test the nature of influence of independent variables on a dependent variable. Regression is able to estimate the coefficients of the linear equation, involving one or more independent variables, which best predicted the value of the dependent variable. Coefficient of determination explains the extent to which changes in the dependent variable can be explained by the change in the independent variables or the percentage of variation in the dependent variable (profitability indicated by ROE) that is explained by all the three independent variables (long-term debt, total debt and size). The study sought to establish the relationship between capital structure and financial performance of investment firms listed at the Nairobi Securities Exchange.

Table 4.9 Model Summary

Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	0.902	0.813604	0.754	0.157

Source: Research Findings

The three independent variables (profitability factors) that were studied, explain only 81.4% of the profitability of investment firms listed at the Nairobi Securities Exchange as represented by the adjusted R2. This therefore means the three profitability factors (long-term debt, total debt and size) explains 81.4% of liquidity factors influencing profitability of investment firms listed at the Nairobi Securities Exchange, while other factors not studied in this research contributes 18.6% of profitability of investment firms listed at the Nairobi Securities Exchange. Therefore, further research should be conducted to investigate the other (18.6%) factors influencing profitability of investment firms listed at the Nairobi Securities Exchange Table 4.10 ANOVA Results

Model	Sum of Squares	Df	Mean Square	F	Sig.
1	Regression	2.652	1	.204	8.752	.009
	Residual	1.239	2	.008
	Total	3.891	3

Source: Research Findings

The significance value is 0.009 which is less than 0.05 thus the model is statistically significant in predicting how long-term debt, total debt and log of natural logarithm of assets influences profitability of investment firms listed at the Nairobi Securities Exchange. The F critical at 5% level of significance was 2.46568. Since F calculated (value = 8.752) is greater than the F critical (2.46568) this shows that the overall model was significant.

Table 4.11 Coefficients of Determination

Model	Unstandardized Coefficients	Standardized Coefficients	t	Sig.
	B	Std. Error	Beta
1	(Constant)	0.732	0.864		2.089	0.035
	Long-term debt	0.550	0.110	0.376	3.539	0.016
	Total debt	-0.633	0.958	-0.398	-3.461	0.025
	Size	0.387	0.736	0.267	2.886	0.033
Dependent Variable: ROE

Source: Research Findings

The coefficient of regression in table 4.11 above was used in coming up with the model below: ROE=0.732+ 0.550 LDA-0.633 DA+ 0.387 SIZE

Where ROE is Earning (EBIT) divided by Equity, LDA is long-term debt & DA is total debt both divided by market value capital of Equity, while SIZE is natural logarithm of assets. The study established that all the variables were significant as their significance value was less than

0.05. The three variables (long-term debt, total debt, size) were correlated with profitability of investment firms listed at the Nairobi Securities Exchange with long-term debt and natural logarithm of assets having a positive correlation and total debt having a negative correlation.

From the regression model, taking all factors (long-term debt, total debt, and size) constant at zero, profitability of investment firms listed at the Nairobi Securities Exchange was 0.732. The data findings analyzed also shows that taking all other independent variables at zero, a unit increase in long-term debt will lead to a 0.550 increase in profitability of investment firms listed at the Nairobi Securities Exchange, a unit increase in total debt will lead to a 0.633 decrease in profitability of investment firms listed at the Nairobi Securities Exchange, while a unit increase in log of natural logarithm of assets will lead to a 0.387 increase in profitability of investment firms listed at the Nairobi Securities Exchange. This infers that total debt influences the profitability of investment firms listed at the Nairobi Securities Exchange the most.

Non-parametric Correlation

A Spearman correlation is used when one or both of the variables are not assumed to be normally distributed. The values of the variables were converted in ranks and then correlated. The study correlated ROE, LDA, DA and the firm size under the assumption that these variables are normal.

Table 4.12 Correlations

			ROE	LDA	DA	Firm size
Spearman’s	ROE	Correlation	1.000	.617	.547	.667
Rho		Coefficient	.	.000	.000	.000
		Sig. (2-tailed) N	3	3	3	3
	LDA	Correlation	.617	1.000	.437	.235
		Coefficient	.000	.	.000	.001
		Sig. (2-tailed) N	3	3	3	3
	DA	Correlation	.547	.437	1.000	.441
		Coefficient	.000	.000	.	.002
		Sig. (2-tailed) N	3	3	3	3
	Firm size	Correlation	.667	.235	.441	1.000
		Coefficient	.000	.000	.000	.
		Sig. (2-tailed) N	3	3	3	3

Source: Research Findings

The results suggest that the relationship between ROE and LDA (rho = 0.617, p = 0.000) is statistically significant. ROE and DA had a rho of 0.547 and a p value of 0.000 therefore denoting statistical significance. Similarly, the ROE and firm size posted a rho of 0.667 with a p value of 0.000 therefore providing a statistical significance. LDA and DA had a rho of 0.437, p=0.000 further pointing to a statistical significance. On the same note, the LDA and the firm size correlated at rho=0.235 and p=0.001. This therefore is statistically significant. Finally, the DA and organization firm size at a correlation of rho=0.441 and p= 0.002 revealing statistical significance.

Interpretation of the Findings

From the finding on the Adjusted R squared the study revealed that there was variation of financial performance of investment companies listed in the NSE due to changes in the independent variables which are long term debt, total debt and size. This shows that changes in financial performance of investment companies listed in the NSE could be accounted for long term debt, total debt and size. The study found that there was a strong relationship between financial performances of investment companies listed in the NSE and long term debt, total debt and size. The study found that there was a positive relationship between long term debt, size of investment companies listed in the NSE and financial performance of investment companies listed in the NSE. The study found that there was a negative relationship between total debt and financial performance of investment companies listed in the NSE.

The findings of the study were found to be statistically significance since the significance values was found to be close to 0.000 which was less than 0.05. This is an indication that the error rate on making conclusions using the model derived from the findings was low and therefore the recommendations from these findings would enhance the financial performance of investment companies listed in the NSE.

According to the study findings long term, total debt and size were significantly influencing financial performance of investment firms listed at the NSE. These findings correlated with Tong and Ning (2004) who asserts that in the event of corporations successfully managing its foreign exchange risks the benefits received from such effective execution will have a long- term positive impact in creating value for the company hence increasing finance performance.

The study found that the coefficients of the long term debt and size were positive an indication that a unit change in these variables would lead to an increase in financial performance of the

Investment companies listed in the NSE. There was a strong relationship between financial performances of investment companies listed in the NSE and long term debt, total debt and size. These findings were similar with a study done by Rajan (2008) who found that future investment prospects affect firm performance. A firm with higher growth options will have a higher performance as it’s favorable to investors who have higher prospects of recovering their investment. If a firm has lower growth options it’s likely to be erased by competitors leading to eventual collapse hence lower performance.

From the findings the study revealed long term debt, total debt and size influence financial performance of investment firms listed at the NSE. This clearly shows that capital structure affect financial performance of firms listed at NSE. The total loans in these firms could lead to high interest expense hence lowering the size of the firm as well as reduced shareholders wealth. The shareholders can decide to withdraw their investment in terms of shares in the company if the managers make decision to continue increasing the total debt and these can lead to financial crisis of the firms listed in NSE. The same findings concurred with Hutchinson (1995) as well as Wandeto (2005) who found that high-growth firms might have more options for future investment than low-growth firms. Thus, highly leveraged firms are more likely to pass up profitable investment opportunities, because such an investment will effectively transfer wealth from the firm's owners to its debt holders. As a result, firms with high growth opportunities may not issue debt in the first place, and leverage is expected to be negatively related to growth opportunities.

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

Introduction

From the analysis and data collected, the following discussions, conclusion and recommendations were made. The responses were based on the objectives of the study. The researcher had intended to determine the relationship between capital structure and financial performance of investment firms listed at the NSE.

Summary

From the findings on the Adjusted R squared, the study revealed that there was variation of financial performance of investment firms listed in the NSE due to variations in long term debt, total debt and size. The study revealed that long term and total debt were the major factors influencing the financial performance of investment firms listed in the NSE. From the findings on the correlation analysis the study revealed that there was a strong relationship between capital structure and financial performance.

The study further revealed that the analyzed data is ideal for making a conclusion on the influence of long term debt, total debt and size on financial performance of investment firms listed at the NSE. The study revealed that long term debt, total debt and size were significantly influencing the financial performance of investment firms listed at the NSE (John, & Williams, 2005).

The study found that the coefficients of the long term debt and size were positive an indication that a unit change in these variables would lead to an increase in financial performance of the investment companies listed in the NSE. There was a strong relationship between financial performance of investment companies listed in the NSE and long term debt, total debt and size (Kennerley, 2002). The coefficient on total debt was negative an indication that there existed a negative relationship between total debt and financial performance of investment companies listed in the NSE. An increase in the total debt would therefore lead to a decrease in the financial performance of investment companies listed in the NSE.

Conclusion

From the findings the study revealed long term debt, total debt and size influence financial performance of investment firms listed at the NSE. This clearly shows that capital structure affect financial performance of firms listed at NSE. The study concludes that long term debt of investment firms listed in the NSE is positively related to financial performance of firms listed at NSE, this is attributed to the fact that the long term debt is utilized to run the operations of these companies and by doing so reduce the losses that the firm would have undergone if there was shortage of the long term funds. The study concludes that total debt affects financial performance of the firms listed in the NSE. The higher the total debt, the less the return on equity as well as reduced shareholders wealth which indicates a need to increase more capital injection rather than borrowing. The total loans in these firms could lead to high interest expense hence lowering the profitability of the firm. The firms should therefore fund investments from internal sources in order to enhance their financial performance. This is also supported by Maniagi et.al, (2013) who says that the benefits of debt financing are less than its negative aspects.

Recommendations for Policy

It is critical for the Chief Executive Officers and Chief Finance Officers of the Investment firms when seeking to fund the firm’s assets to understand the impact of capital structure on their organization’s financial performance as well the cost of funds.

There is need for the firms listed in the NSE to have a strong capital structure which provides them strength to withstand financial crises and offers shareholders a better safety net in times of depressions. In addition the capital market analysts as well investment analysts should advise the investment firms on the optimal capital structure based on capital structure analysis.

The study recommends that there is need for the firms to increase their size by growing their assets as it was revealed that size positively impacts on the financial performance of the firms.

The study also recommends that there is need for the firms to adopt strategies that would increase their size base and utilize the profits generated from the operations to acquire more assets and improve their financial performance.

REFERENCES

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Block, Z. & McMillan, D. (2005), “Milestone for Successful Planning”, Harvard Business Review, 63, 5, 184-196 Business Journal, 30, 301-313.

Brigham, E. & Houston, F. (2005), Fundamentals of Financial Management, 9th ed., Harcourt Brace College, San Diego, CA.

Brigham, E. (2007). Fundamentals of financial management: Cengage Learning.

Chen, C. (2004). Managerial ownership and agency conflicts: a nonlinear simultaneous equation analysis of managerial ownership, risk taking, debt policy, and dividend policy, Financial Review, 34, 119-36.

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Fischer, O., Heinkel, R. & Zechner, J. (2009). Dynamic capital structure choice: Theory and tests. Journal of Finance 44(1), 19-40.

Gachoka K. (2005). Capital structure choice, an empirical testing of the pecking order theory among firms quoted on the NSE, unpublished MBA project, University of Nairobi.

Gachoki, B. (2005).The Relationship between Financial Structure and Performance of Micro and Small Interprises in Nairobi. Unpublished MBA project, University of Nairobi.

Gachoki, F. (2005). The Relationship between dividend payout and firm performance: a study of listed companies in Kenya, European Scientific Journal, edition (8).

Hall, C., Hutchinson, J. & Michaelas, N. (2008). Determinants of the capital structures of European Stock Market. Journal of Business Finance and Accounting, 31(5-6), 711- 728.

Hamilton, B. (2010), Does entrepreneurship pay? An empirical analysis of the returns to self- employment, Journal of Political Economy, 108, 604-31.

Holmes, S. 2003). “Capital structure and financing of SMEs: Australian evidence”. Journal of Accounting and Finance, (43), 123–147.

Hovakimian, A., Hovakimian, G. & Tehranian, H. (2004). Determinants of target capital structure: The case of dual debt and equity issues* 1. Journal of Financial Research, 71(3), 517-540.

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Kennerley, M. (2002). The Performance Prism: The Scorecard for Measuring and Managing Business Success, Financial Times/Prentice Hall, London.

Kester, W. (2006). Capital and ownership structure: a comparison of United States and Japanese manufacturing corporations, Financial Management.

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APPENDICES

Appendix I: Investment Firms listed at the NSE as at 30th June 2014

No.	Firm	Year Listed
1.	Centum Investment	1967
2.	Olympia Capital Holdings	1976
3.	Trans Century Ltd	2009

Source; NSE Hand book

Appendix II: Data Collection Template

Company/Year	Variable	2010	2011	2012	2013
	Revenue
	LTD
	TD
	Capital
	Revenue
	LTD
	TD
	Capital
	Revenue
	LTD
	TD
	Capital

Source: Author (2014)

Appendix III: Work Plan

The table below shows the schedule of all the events, it indicates the month each particular activity took place.

ACTIVITY	PERIOD
	Jun	Jul	Aug	Sep	Oct
Preliminary literature review
Consultations with supervisor
Thesis proposal writing
Developing instruments
Thesis proposal defence
Data Collection, Analysis and thesis completion

Source: Author (2014)

Limitations of the Study

There were challenges uncounted during the study. Some companies had not submitted their annual financial result to CMA and managers of this firm were reluctant to release information required for the study. That reluctance delayed the completion of the data collection.

All the data was collected from secondary sources and any error in the original data could not be avoided however all data was from reliable source only.

The study was based on a four year study period from the year 2010 to 2013 since some of the firms like TransCentury listed in 2011. A longer duration of the study will have captured periods of various economic significances such as booms and recessions. This may have probably given a longer time focus hence given a broader dimension to the problem.

Areas for Further Research

The study recommends that a study should be undertaken on the factors affecting the size of firms listed in the NSE.

The study was confined to Investment firms listed in the Nairobi Securities Exchange; further study should be undertaken on other firms in other sectors of the economy such as; industrial, banking, manufacturing and other sectors.

A study should also be undertaken on the effect of capital structure on the other companies which have not yet been listed in the NSE.