Capital Structure, Firm Size and Profitability of Insurance Companies Listed on the Nairobi Stock Exchange in Kenya
Abstract
Liabaya Makuda Christopher and Michael Njogo
The study looked at the effect of capital structure on profitability of insurance companies quoted on the Nairobi Securities Exchange (NSE) with size of the company used as a moderating variable and underwriting risk (loss ratio) as a control variable. Equity capital, long-term debt and short-term debt were theoretically defined as the main elements of the capital structure that affect the financial performance of the firm. The study was based on the theories of trade-off theory, pecking order theory and agency cost theory. The research design employed in this study was panel research design with secondary data gathered from five listed insurance companies in the period of 2015-2024. We used Fixed Effects regression with robust standard errors in STATA 17 to analyze the data. The other findings showed that long-term debt (β = 0.0643, p = 0.625) and short-term debt (β = 0.1058, p = 0.243) have positive relationships with profitability but were not statistically significant. A positive but insignificant effect was found for underwriting risk (β = 0.2350, p = 0.150) on profitability. The results also indicated that about 33% of the differences in profitability could be explained by the unobserved organizational characteristics, or firm-specific effects (ρ = 0.3308). The results indicate that the components of capital structure have positive association with profitability but they are not significant factors of performance for all the NSE-listed insurance companies. The study concludes that profitability in the insurance sector in Kenya is more a function of the operation and strategies of the firm than financing decisions. Based on the study, the following recommendations are made to achieve better profitability: insurance companies need to prioritize efficient capital allocation, debt management, prudent debt policies, and good corporate governance. Governments need to bolster insurance sector regulation and encourage risk-based capital management systems to enhance insurance stability.