Effect of Debt Financing on Shareholder Value Creation of Non-Financial Firms at Nairobi Securities Exchange
Abstract
Debt finance may either be long term or short term; a company may prefer long-term debt because of the tax deduction on interest payment which is a distinct advantage over equity. The amount of debt a firm utilizes to fund its activities depends on interest charged on debts, corporate income taxes rates, withholding taxes, and cost of financial distress and covenant restrictions in financial agreements. Rational investors expect good long term yield of their investment. Debt financing play an imperative role in general performance of a company and shareholder value creation. Shareholder value creation and profit maximizing are among the primary objectives of a firm. Shareholder value creation focuses more on long term sustainability of returns and not just profitability. There have been a number of firms facing financial crisis among them; Mumias Sugar Ltd, Uchumi Supermarkets Ltd and Kenya Airways Ltd. All these companies are quoted at the Nairobi Securities Exchange. Due to declining performance of these companies, share prices have been dropping and shareholders do not receive dividends. The aim of this study was to investigate the effect of debt financing on shareholder value creation of non-financial firms quoted at the Nairobi Securities Exchange for the period 2008-2014. The study was guided by Modigliani and Miller theory. The study used general and empirical models from previous studies as a basis for studying specific models which were modified to suit the current study. The study was guided by the positivism philosophy. The study employed explanatory design which is non-experimental. Census design was used as the number of non- financial firms at the time of the study was 40 companies. The data was gathered from NSE handbooks and CMA publications comprising of annual financial statements, income statements and accompanying notes. Ordinary Least Square regression analysis was conducted to examine the effect of debt financing decision on shareholder value creation. The results revealed that debt financing had a statistically significant positive effect on EVA. The study further analyzed sector based differences among companies listed at the NSE. The results indicated significant differences among various sectors in respect to the effects of debt financing on shareholder value creation. Feasible generalized least squares were used to estimate the model. Diagnostic tests were conducted to ensure non-violation of the assumptions of Classical Linear Regression Model. Among the tests conducted; includes panel unit root test and Autocorrelation. Study model tests showed that, there was non-violation the assumptions and hence the model found fit for further analysis. The study recommends that managers of quoted non-financial companies should strive and practice periodic shareholder value creation analysis for continuous assessment of growth process. The government through the CMA should come up with regulatory framework that guide firm listed in enacted dividend policies. Further it is recommended that shareholder value creation report is enforced as an additional statement published by the firms quoted at the NSE, Kenya.
Key Words: Debt, Financing, Shareholder, Value Creation, Non-financial, Firms
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