Joint Effect of Financial Leverage, Agency Costs and Firm Size on Financial Performance of Non-Financial Firms Listed in the Nairobi Securities Exchange, Kenya

Non-financial firms play a crucial role in any economy by contributing significantly to a country’s Gross Domestic Product (GDP). In Kenya's economic landscape, the contribution of non-financial firms to GDP is currently recorded at 31.4%, which is considerably far much below the globally recommended average of 50%. The suboptimal contribution of Kenya’s nonfinancial firms to the national GDP raises concerns about the overall economic health and sustainability of the country, necessitating a comprehensive examination of the factors influencing the financial performance of these firms. This study, therefore, sought to establish the joint effect of financial leverage, agency cost and firm size on financial performance of nonfinancial firms listed at NSE. The study adopted a mixed approach research design comprising of descriptive, causal and longitudinal designs to a study population of 40 non-financial firms listed at NSE as at 1st January 2010 where 29 firms were purposively sampled and pooled for 14 years (2010-2023) to obtain 406 firm-year observations. Data was obtained from the NSE website, World Bank reports as well as Capital Market Authority website. A transformed regression model-feasible generalized least squares was fitted in case of existence of autocorrelation and heteroscedasticity. The study findings revealed that the joint effect of financial leverage, agency cost and financial performance was statistically significant with DER and AUR showing a statistically significant positive effect while ICR showed a statistically significant negative effect on financial performance. DAR and LTA showed no significant effect on financial performance. The study expands the existing base of knowledge on financial leverage and financial performance by incorporating the concept of agency cost and firm size on listed non-financial firms in the Kenyan context. The findings particularly highlight the value of maintaining a balanced debt-to-equity ratio while avoiding excessive interest burdens.