The effect of capital structure on profitability of nonfinancial firms listed on the Nairobi securities exchange

Financing businesses presents a number of challenges both to the management and the potential investors. One of the key issues is the choice between debt and equity as financing strategies. Past studies show that firms will try to balance the two financing sources with a view of obtaining an optimal capital structure which will satisfy both the management and the firm's shareholders. This study measured the effect of capital structure on profitability of 30 non-financial firms listed on the Nairobi Securities Exchange over a period of four years (2010-2013). Debt-Equity ratio was used as a proxy for the capital structure of the individual firms while profitability was indicated by three measures including Return on Asset, Return on Equity and Earnings per Share. Data was collected from the published books of accounts of the sample companies. The results while consistent with a number of previous studies which indicate that capital structure does affect profitability negatively, raises the question as to what firm specific factors make for the non-uniformity of capital structure on listed firms . A SIMPLE OLS regression was conducted on a panel using EVIEWS 5 software