Firm-Size and Sectoral Heterogeneity Contribution to the Capital Structure – Financial Performance Nexus in Non Financial Firms: Evidence from Nairobi Securities Exchange

Abstract

This study aimed to investigate the impact of firm size and sector heterogeneity on the financial performance of listed non-financial firms represented on the Nairobi Securities Exchange (NSE). The study employed the panel quantile regression approach on panel data drawn from 42 non-financial firms operational in the period 2016 to 2022 inclusive. The purpose of the study was to highlight heterogeneity-dependent variations in financial performance, which traditional mean-reliant models often ignore. The study established that performance quantiles control the nature of the effects exerted by respective capital structure components. Retrospectively, retained earnings exert stronger effects on lower-performing firms; debt financing is largely felt in high-performing firms; and equity allocation appears to have been inefficient. The study also confirmed the moderating effect of firm size on the capital structure-financial performance nexus, with smaller firms deriving more benefits from internal financing and larger firms primarily gaining from debt and equity financing, especially in the upper performance quantiles. Moreover, the study also demonstrated the contribution of sectoral heterogeneity by showing the variations in the effects exerted by capital structure components based on the respective sectors. The study findings emphasized the importance of taking cognizance of contextual factors like firm size and sector dynamics when compelled by capital structure performance decisions and offer avenues for the formulation of enabling policy directions needed for optimal capital decisions.