Effect Of Financial Leverage On The Relationship Between Board Composition And Financial Performance Of Firms In Nairobi Securities Exchange, Kenya

ABSTRACT

Firms listed at the Nairobi Securities Exchange (NSE) contribute significantly to Gross Domestic Product (GDP), averagely contributing 17.6% annually during the period 2003 to 2017. However, financial performance of listed firms remains poor as evidenced by delisting and suspension of 16% of firms in the same period, which threatens Kenya’s economic growth. Although empirical evidence links financial performance to both board composition and financial leverage, results are inconclusive. Prior studies focused on either accounting-based or market-based performance measures indicating that the effect of; board composition on value-added financial performance; financial leverage on value-added financial performance; and of both board composition and financial leverage on value-added financial performance, have not been analysed. The main objective of the study was to analyse the effect of financial leverage on the relationship between board composition and financial performance of firms listed at the NSE. Specifically, the study sought to; establish the effect of board composition on value-added financial performance; analyse the effect of financial leverage on value-added financial performance, and; examine the mediating effect of financial leverage on the relationship between board composition and value-added financial performance of firms listed at the NSE. The Resource Dependency, the Pecking Order, and the Agency Cost theories underpinned the study. Correlational research design was with a census of the 64 listed firms as at December 2014 used. Purposive sampling technique obtained 456 firm-year observations from 2003 to 2014 for 38 firms. Hierarchical fixed effects multiple regression was used to analyse data. Results showed: positive significant effect of both gender diversity (β = 0.2737, p = 0.000) and board size (β = 0.2934, p = 0.000) on value-added financial performance, but negative significant effect of board independence (β = - 0.2430, p = 0.000), implying that a unit increase in gender diversity and board size leads to 27.37% and 29.34% increase in value-added financial performance respectively; financial leverage has a negative significant effect (β = -0.4502; p = 0.000) on value-added financial performance implying a unit increase in financial leverage leads to 45.02% reduction in value-added financial performance; financial leverage partially but significantly mediates the relationship between both gender diversity (indirect effect = 0.1730) and board size (indirect effect = 0.1828), and value-added financial performance, implying that a unit increase in gender diversity and board size leads to 17.30% and 18.28% increase in the value-added financial performance mediated by financial leverage respectively. The study concludes: board gender diversity and board size are significant positive predictors of value-added financial performance; increase in financial leverage significantly reduces value-added financial performance; financial leverage mediates the relationship between both gender diversity and board size, and value-added financial performance. It is recommended listed firms at the NSE: increase board sizes and women in boards; finance their investment activities using internal financing; restructure their boards partially based on financial leverage decisions. Findings may be useful to policy makers and academia in structuring board composition elements to create value for firms in NSE.