Asian Journal of Economics, Finance and Management

The construction and allied firms listed on the Nairobi Securities Exchange (NSE) have largely faced challenges in achieving profitability, with many reporting consistent losses over the years. A key factor contributing to these losses is the inefficient use of debt financing, which undermines overall productivity. This study investigates the impact of debt financing on the financial performance of construction and allied firms listed on the NSE. The specific objectives include examining the effects of short-term debt, long-term debt, and total debt on financial performance, as well as exploring the moderating role of firm size in the debt–performance relationship. The study is anchored on five key theories: Pecking Order Theory, Modigliani and Miller Theory, Trade-off Theory, Profit Maximization Theory, and the Growth of the Firm Theory. Guided by a positivist research philosophy, a quantitative approach was employed. A census of four construction and allied firms listed on the NSE over the period 2015–2021 was conducted, using secondary panel data. Data analysis was carried out using STATA software, where panel regression analysis tested the relationships among the variables. The results revealed that both short-term and long-term debt had negative and significant effects on financial performance, while total debt had a negative but insignificant effect. Overall, the findings underscore the risks of excessive debt reliance and highlight the need for construction firms to adopt prudent financing strategies, including reducing dependence on short-term borrowings and exploring internal financing to enhance sustainable performance.