Capital Structure Formation And Investment Performance Of The General Insurance Companies In Kenya

ABSTRACT

Financial management models have impact on wealth maximization. Wealth is maximized when a positive net present value is earned on investments. The use of debt and equity forms the capital structure of a company. Recent empirical studies have focused on how debt or equity affects financial performance. There has not been adequate analysis of the combined effect of debt and equity in the same model on investment performance. Moreover, these studies have not provided conclusive results on the optimality level of debt and equity. This study examined the debt and equity capital effect on investment performance of the general insurance companies in Kenya. The return on assets and equity were used to measure the performance for a broader view of capital structure formation. The study was anchored on the pecking order, trade-off and agency cost theories. Firm size tested the moderation effect in the relationship. The descriptive research design was employed whereas the panel regressions and correlation analysis tested the relationships strength and direction in the study models. The study target population comprised of seventy-two insurance companies. The sample consisted of thirty-nine general insurance companies purposively sampled. Secondary data was collected using customised schedules. The statistical package for social scientists and Microsoft Excel spreadsheets were employed in data analysis. The study revealed that long-term debt had a significant positive effect on return on assets whereas it showed a significant negative relationship with return on equity. The total debt had a significant negative relationship with the return on assets and equity. The total equity had a significant negative relationship with the return on equity. The firm size had a positive moderating effect on the return on assets and equity. The study recommended the use of long term debt to achieve improved investment performance. Further studies focusing on life and composite insurance companies can use longer period panel data on short term debt and staff productivity to facilitate comparisons.