Effect of financial structure on financial stability of non-financial firms listed at the Nairobi security exchange

Abstract

Non-financial companies listed on the NSE significantly contribute to the nation's economic growth by providing goods and services. However, these companies' financial soundness has been deteriorating in recent years. Poor financial structure consideration is the cause of this. Therefore, the study aimed to examine how financial structure affected the financial stability of non-financial companies listed on the Nairobi Securities Exchange in Kenya. Among its specific goals were to ascertain the impact of short-term debt on the financial stability of listed non-financial firms at the Nairobi Securities Exchange, the impact of retained earnings on the financial stability of listed non-financial firms at the Nairobi Securities Exchange, and the impact of long-term debt on the financial stability of non-financial firms listed at the Nairobi Securities Exchange. Pecking order theory, trade-off theory, and signal theory served as the study's guiding theories. This study employed a descriptive research design. The 44 non-financial companies listed on the NSE were the primary focus of this study. With panel data spanning 2018 through 2022, secondary sources were used to collect information on financial stability and structure. STATA 17 was used to analyze the data using statistical techniques such as multiple regression, correlation, and descriptive statistics. Diagnostic tests were conducted to check for heteroscedasticity, autocorrelation, multicollinearity, normality, and the Hausman test. Tables were then to be used to present the data. Following data analysis, the study found a positive and substantial relationship between the financial health of the non-financial enterprises listed on the NSE and retained earnings and long-term loans. However, there was no statistically significant correlation between short-term debt and the firms' financial soundness. Therefore, aside from short-term debts, the study's research showed that the financial structure components utilized to determine their association with the financial stability of non-financial enterprises listed on the NSE were statistically significant. This confirmed that the components of the financial structure in this instance had an impact on non-financial firms listed on the NSE; thus, according to the hypothesis, short-term debts had a negligible impact on financial stability, whereas long-term and retained earnings had a significant impact. Therefore, the study concluded that long-term and retained earnings had a strong and positive relationship with financial stability, while short-term earnings had a negligible impact. It also suggested that future research should investigate extrapolating other financial structure components and whether they will affect the financial stability of nonlisted financial firms in the NSE. Their upcoming studies could also improve this to assess the difficulties non-financial companies listed on the NSE encounter when conducting business using various financial structure components.