Effect of Capital Structure on Financial Performance of Agricultural Firms Listed at the Nairobi Securities Exchange

Abstract

This study paper focused on capital structure and financial performance of agricultural firms listed at the Nairobi Securities Exchange. The main objective of the study was to determine the relationship between capital structure and financial performance of the listed agricultural firms. The study was anchored on the Capital Structure Irrelevant Theory and the Pecking Order Theory. The study employed descriptive survey research design, covering a population of seven listed agricultural firms over the period 2014 to 2021. The study relied on secondary data collected from the annual reports of the targeted institutions over the study period. The dependent variable in the study was financial performance which was measured using ROA ratio while the main independent variable was capital structure measured using debt-to-equity ratio for the years 2014 through 2021. Control variables in the study included organizational size, inflation, and economic growth. Organizational size was measured using total asset sizes of all Kenyan agricultural companies with a public listing from 2014 to 2021, as standardized using Log, inflation was measured using CPI value from 2014 to 2021, while economic performance was assessed using GDP growth rate for the period 2014 to 2021. Data collected on these variables was analyzed using descriptive and regression analysis. Based on descriptive statistics; the average performance of the listed agricultural firms in Kenya as measured using ROA ratio was 5.3%, with a standard deviation of 11.4%. The highest ever recorded ROA over the period 2014 and 2021 was 43.8% while the lowest ever recorded was -13.2%. The average Debt-to-equity ratio of the listed agricultural firms was 27.3%, implying that debt used was less than 50% amongst the firms. The highest debt-to-equity ratio recorded over the period was 48.9% with the lowest standing at 8.5%. The average inflation as measured using CPI was 153, with the highest in the period standing at 184 while the lowest was 109. The average GDP recorded in the period 2014 and 2021 in Kenya was 8.1Million KES, with the highest being 9.3Million KES. Findings further showed that the average size of agricultural firms listed at the NSE as evaluated using total assets was 5.1Billion KES, with the largest recorded at 15.1Billion KES. Findings of the study as proved with regression analysis revealed that capital structure had a positive effect on the financial performance of listed agricultural firms in Kenya. The effect of capital structure was however insignificant as proved by Student T test findings’ p value of 0.488, which was above 5% level of significance. The model enlisting capital structure, organizational size, inflation, and economic growth explained 20.3% of the variation in financial performance of agricultural firms listed on the NSE. The impact of the model was significant as revealed by an F test’s p value of 0.019 which was below 5% level of significance. Specifically, organizational size and inflation positively affected financial performance of the firms while economic growth negatively affected financial performance of the institutions. The study concluded that the prudent management of capital structure is critical for the performance of listed agricultural firms resulting to improved performance with regards to savings on financing costs, reduced chances of financial distress, and growth in revenues.