Capital Structure Decisions and Financial Performance of Firms Listed in the Alternative Investment Market Segment of the Nairobi Securities Exchange.

Financial performance, reflected in profitability, liquidity and market valuation, is a critical measure of the sustainability and growth of small and medium-sized enterprises (SMEs) listed on the Alternative Investment Market Segment (

Aims

of the Nairobi Securities Exchange (NSE). Despite relaxed listing requirements and tax incentives intended to widen SME access to public capital, AIMS-listed firms continue to face thin market liquidity, high perceived investment risk, limited access to affordable long-term debt and governance gaps, with the segment accounting for less than 5% of total NSE market capitalization and more than 60% of its firms reporting volatile or declining profits between 2019 and 2024. Therefore, the purpose of this study was to examine the relationship between capital structure decisions and financial performance among firms listed on

Aims

It specifically examined the influence of debt-based financing, equity-based financing, hybrid financing and retained earnings-based financing on financial performance. The study was anchored on the Static Trade-Off Theory, Agency Cost Theory, Market Timing Theory and Pecking Order Theory. A descriptive and explanatory cross-sectional research design was adopted, targeting all nine AIMS-listed firms through a census, from which five finance and strategic decision-makers per firm were purposively selected, giving a sample of 45 respondents. Primary data were collected using a structured Likert-scale questionnaire and were supplemented with secondary data from audited financial statements. Both descriptive and inferential statistical methods, namely Pearson correlation and multiple regression analysis, were used to analyse the data, which were presented in tables and discussed. The findings revealed that the four financing decisions jointly explained 44.8% of the variation in financial performance (F = 3.236, p = 0.027). Hybrid financing had the strongest positive and significant influence on financial performance, followed by debt-based financing, while equity-based financing and retained earnings-based financing had positive and significant but comparatively smaller influences. The study, therefore, recommends that AIMS-listed firms should adopt balanced and well-monitored debt strategies aligned with cash flow capacity, expand equity financing while carefully managing dilution, prioritize hybrid instruments such as convertible securities to enhance flexibility and cost efficiency, and strengthen profit retention and reinvestment policies complemented by external financing.