Abstract:
Debt financing is the means by which organizations mix different forms of debt in their capital structure. It involves making decisions on optimal mix of long term debt as well as short term debt to finance investment projects of a firm. In raising funds to finance operations and investment projects of a firm, managers consider a debt structure that would increasing the financial performance and increasing the shareholders wealth. Petroleum firms are capital intensive in operations and investments, majority of petroleum firms in Kenya have closed their business like BP and Caltex but at the same time other firms have been started and expanded their business like Total Kenya, Shell and KenolKobil. However, Total Kenya has experienced sluggish financial performance as contrasted to KenolKobil. The objectives of the study were to determine the effect of total debt on financial performance; to find out the effects of long term debt on financial performance; to establish effects of short term debt and financial performance and to assess moderation role of firm growth rate on debt financing and financial performance. The pecking order theory and trade off theory were used to direct and predict impact of predictor variable on the outcome variable. The study adopted a descriptive comparative study design. The target population of the study was listed petroleum firms under the energy and petroleum sector of the Nairobi securities exchange. A comparative analysis of total Kenya and KenolKobil was conducted for the period of eleven years from 2007 to 2017. The study utilized secondary data collected from published financial reports. Panel secondary data was collected using data collection schedule that recorded constructs of interest for each individual firm. The study analyzed descriptive statistics and inferential statistics. Moderation effects were estimated using hierarchical regression. The findings indicated that total debt, long term debt and short term debt had a significant negative relationship with financial performance as measured by ROA and ROE. Growth rate was found to have an enhancing effect on Total Kenya while it showed a buffering effect on KenolKobil. Further, listed petroleum firms in Kenya followed both the pecking order and the tradeoff models of capitalization. The study concluded that debt financing of a firm leads to diminishing revenues. The study recommended that firms should weigh the cost of debt and the expected rate of returns in order to decide on optimum level of debt to issue.
