INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH ISSN: 2617-4138 IJARKE Business & Management Journal DOI: 10.32898/ibmj.01/6.2article15 www.ijarke.com 101 IJARKE PEER REVIEWED JOURNAL Vol. 6, Issue 2 Nov.’23 – Jan. 2024 Financial Leverage and Firm Value of Insurance Companies Listed at the Nairobi Securities Exchange in Kenya Issack Hussein Nunow, Kenyatta University, Kenya Dr. Francis K. Gitagia, Kenyatta University, Kenya 1. Introduction The insurance sector plays an important role by underwriting risks for customers to prevent future losses. Risks are unforeseen circumstance whose occurrence cannot be predicted with certainty. If not well mitigated through insurance, occurrence of the risk can results into significant losses. Thus, the insurance sector comes in to curb the possible losses that people would incur when risks have occurred. According to statistics from the Insurance Information Institute (III) (2021), the insurance sector contributed 3.1% to the global gross domestic product (GDP). This demonstrates the significant role of the insurance and the need to receive adequate attention by policy makers. Firm value of the insurance sector has received significant attention among scholars. In the year 2019, a number of countries around the world recorded an improvement in ROE as follows: Russia (52.3%) Argentina (49.3%) and Turkey (42.4%) (OECD, 2020). In Africa, the value of insurance sector as of 2020 was estimated at US$ 70 Billion (OECD, 2020). Financial leverage allows the firm to borrow funds that can be utilized to fund viable investment projects that would generate returns to shareholders (Bui, Nguyen & Ngo, 2021). Within the context of Pakistan, Akhtar, Yusheng, Haris, Ain and Javaid (2021) argued that short and long term debts are key aspects of financial leverage in the firm. In Sri Lanka, Ravindran and Kengatharan (2021) shared that the amount of debts and equities in the Short term debt of an entity will inform financial leverage. In Nigeria, Abubakar (2021) said that financial leverage allows the firm to utilize short term and long term debts to optimize the wealth of shareholders. In support of these views, Okumu and Jagongo (2020) reiterated that short term and long term debts as well as equities are important aspects of financial leverage in an organization. Tangut (2017) viewed financial leverage in terms of debts and equities that contribute towards firm value of the firm. Kithandi and Katua (2019) covered interest coverage besides debts and equity as financial leverage in the firm that contribute towards firm value. 1.1 Firm value INTERNATIONAL JOURNALS OF ACADEMICS & RESEARCH (IJARKE Business & Management Journal) According to Kenya Bureau of statistics the sector contributed to 6% of the overall Gross Domestic Product. The industry plays a critical role in development of economy in mitigation of risk. However, the firm value of listed insurance companies has shown periods of decline and mixed performances as indicated by market capitalization. For instance, firm value of the listed insurance companies has been fluctuating across the 5year period with the highest market capitalization being 99.3 billion in 2018 and lowest being 56.9 billion in 2022. The question as to the effect of financial leverage on the firm valuation remains unanswered and the few attempts made gives contradicting answers. It’s against this background that the research project was intended to determine the relationship between financial leverage and firm value of insurance companies listed at the Nairobi Securities Exchange, Kenya. More specifically, the study sought to establish effect of short-term debts, long term debts, debt-equity financing and interest coverage on firm value of insurance companies listed at the Nairobi Securities Exchange, Kenya. The study was guided by pecking order theory, trade off theory, Modigliani-Miller (MM) theory and shareholders value Theory. The research used descriptive survey design. The target population was all insurance companies listed at the Nairobi Securities exchange. A census of all insurance firms listed in the Nairobi Securities Exchange was done. The study utilized secondary data from financial reports as published in the NSE handbook and Kenya National Bureau of Statistics for the period between 2018-2022. Panel regressions analysis and Pearson’s product moment correlation analysis were used for inferential analysis while means and standard deviations were used for purposes of descriptive analysis. Feasible Generalized Least Square (FGLS) regression results indicated that short term debt, long term debt and debt equity had a statistically significant positive effect on firm value. On contrary, interest coverage was found to have a statistically significant negative effect on firm value. Correlation analysis indicated that Short term debt and debt equity had a weak positive correlation with firm value; long term debt had strong positive correlation with firm value whereas interest coverage had strong negative correlation with firm value. The study concludes that increases in short term debt, long term debt and debt to equity leads to increased firm value while increases in interest rate reduces firm value. Consequently, the study recommends that, companies increase long term debt, short term debt and debt to equity ratio. Contrary, interest rate should be reduced. Key words: Financial Leverage, Firm Value, Insurance Companies, Nairobi Securities Exchange