Effect of Equity on Financial Performance of Financial Institutions Listed in Nairobi Securities Exchange

Abstract

Financial instruments are used on a wider scale mainly due to the global financial crisis. These tools are central in averting financial risks in many countries for a long time. The general objective of the study was to determine the effect of equity on financial performance of financial institutions listed in Nairobi Securities Exchange. The study was supported by trade-off theory, pecking order theory and preferred habitat theory. The study adopted a descriptive design. The target population of the study was 18 listed financial institutions in Nairobi Security Exchange. This study also adopted purposeful sampling technique to select a sample size of 10 listed commercial banks. The study used secondary data, which was collected using a data collection sheet obtained from financial reports for 10 years from 2011-2020. Descriptive statistical methods such as minimum, maximum, mean and standard deviation were used to analyse data. In addition, inferential statistical methods like correlation and panel data regression analysis were used to determine the effect of the financial instruments on the performance of financial institutions. The findings of the study were presented in figures and tables. The study identified that equities had positive and significant relationship with financial performance of listed financial institutions at Nairobi Securities Exchange.The study identified that, equities had a weak, positive and significant correlation with financial performance of listed financial institutions in Nairobi Securities Exchange. Accordingly, an increase in equities led to a corresponding improvement in financial performance of listed financial institutions. Similarly, it was demonstrated that, equites had a positive and statistically significant effect on financial performance of listed financial institutions in Nairobi Securities Exchange. As result, a change in equites increased financial performance of listed financial institutions in Nairobi Securities Exchange substantially. It was concluded that, equities had a weak, positive and significant effect on financial performance of listed financial institutions in NSE. Accordingly, an increase in equities led to a corresponding increase in financial performance of listed financial institutions. Similarly, the study concluded that equites and financial performance of listed financial institutions at NSE had positive and significant effect relationship. As result, a change in equites led to change in financial performance of listed financial institutions in NSE. The study recommended that outfits listed at NSE ought to increase leverage through equity. Equity provides a cheap source of financing. Thus, increased equity scales up amount funds available for re-injection into existing and new more profitable projects. Investments in new projects would enhance return on equity leading to increased financial performance. Additionally, the increasing equity financing requires firms to reduce equity: debt ratio from external and expensive sources. This, reduces the amount of paid interests, hence increasing profitability

Key words: Financial Instruments, Equities, Financial Performance, Nairobi Securities Exchange, financial institutions.

DOI: 10.7176/RJFA/15-8-05

Publication date: September 30th 2024