Effect of Equity on Financial Performance of Listed Insurance Corporations In Kenya

Abstract

Efforts to revive ailing corporations across the world have mostly been centered on financial restructuring and re-engineering. Slow growth in the financial performance of insurance companies in Kenya coupled with low market penetration rate motivated the researcher’s interest to investigate the effect of Equity on financial performance of these organizations. Three theories namely the Modigliani and Miller Theory, the Pecking Order Theory, and the Trade Off Theory guided the study. The concepts of capital structure and financial performance as well as empirical literature are discussed in chapter two. A descriptive research design was adopted to describe the relationship between the variables of the study. Whereas equity capital forms the independent variable, financial performance as measured by ROA formed the dependent variable. The target population was a census of all insurance firms listed at the Nairobi Securities Exchange (NSE). The study used secondary data extracted from the annual financial reports of respective firms from 2016 to 2020. Data coding and analysis was done using version 28 of the SPSS and STATA version 18 software while financial ratios were calculated using Microsoft Excel spreadsheet. The data was then summarized using descriptive statistics which included the standard deviation and weighted means. There were significant positive correlations between ROA and Equity Ratio, suggesting that higher equity was associated with better financial performance (ROA). Overall, the findings indicated that Equity had a positive correlation with financial performance according to regression and panel data analysis. The study recommends that insurance corporations should prioritize equity over debt in their capital structure decisions so as to increase their financial performance