Relationship between Interest Rates and Gearing Ratios of Firms Listed in the Nairobi Securities Exchange

Billy Muthee (), Dr. J Adudah () and Hendrick Ondigo ()

International Journal of Finance and Accounting, 2016, vol. 1, issue 1, 30 - 44

Abstract: Purpose: The objective of this study was to establish the relationship between interest rates and gearing ratios of firms listed in the Nairobi Securities Exchange.Methodology: The study was carried out using a longitudinal research design, employing secondary quantitative data. The population for this study constituted of all listed companies in the Nairobi Securities Exchange. As at December 2013, there are 62 companies listed on the Nairobi Securities Exchange. This study did not sample and hence a census survey was carried out for the study. The study used secondary data. All the data was collected by review of documents, annual reports of the companies, the Nairobi Securities Exchange Handbooks and published books of accounts. The selected period was year 2009 to year 2013 (5 years).The researcher used frequencies, averages and percentages in this study. The researcher used Statistical Package for Social Sciences (SPSS) to generate the descriptive statistics and also to generate inferential results. Regression analysis was used to demonstrate effect of interest rate on the gearing ratio of listed firms.Results: These results showed that there is a negative relationship between gearing ratio and interest expense and profitability as supported by beta coefficients of -0.486 and -0.129 respectively. Firm size had a positive correlation (0.275), which means that an increase in firm size causes an increase in the gearing ratio. The analysis also yields results that showed that interest expense, firm size and profitability were statistically significant.Unique contribution to theory, practice and policy: the study recommended that; the firms should adopt strategies that increase their firm size resulting to a scenario whereby they increase their collateral and thus granting them the ability to access more debt, firms should ensure that they optimize their profits so as to reduce their gearing ratio and thus cause growth, firms should seek to adopt other ways of financing their activities since interest expense had a negative relationship with gearing ratio.

Keywords: gearing ratio and interest expense and profitability; firm size (search for similar items in EconPapers)
Date: 2016
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