The Relationship Between Asset Structure and Capital Structure of Agricultural Firms Listed in the Nairobi Securities Exchange
In Kenya, the capital structure of a firm and its relation to its financial performance of a firm has been widely studied. However, in order to have a strong capital structure, the asset structure needs to be as strong. The Asset structure of a firm is an important aspect as it measures its ability to survive and competes with other firms. It also guides in decision making in regards to the way finance is raised. A firm that does not have a strong asset structure cannot be able to request for external financing. Capital structure refers to the decision between the debt, debt equivalent source of finance and equity financing of the firms activities. This research aimed at determining if asset structure and capital structure are related. Empirical evidence in Kenya has shown that minimal attention has been put into asset structure whereas capital structure studies are numerous. However, research done on both asset structure and capital structure from other countries give different results. Esperanca et al (2003) studies showed asset structure and capital structure had a positive relation whereas Hall et al (20014) discovered asset structure and long term debt were positively related but asset structure and short-term debt were negatively related. This research looked into the capital structure theory, trade off theory, pecking order theory and the agency theory to understand the phenomenon involved. The conceptual framework diagrammatically illustrated the independent and dependent variables and also the intervening variables. The null hypothesis stated that there was no relationship between the asset structure and the capital structure. The alternative hypothesis stated that there was a relationship between asset structure and capital structure. The seven agricultural firms listed in the Nairobi Securities Exchange was the population and secondary data was utilized. The research design used was the explanatory non-experimental research design. The data was acquired from the NSE Investors handbook 2015-2016, CMA online resource portal and various company websites. Descriptive analysis was used. The study required quantitative analysis to be carried out. The period of study was 2011-2015. Data was analyzed using SPSS. The findings were summarized and presented using tables. This study showed that 66.7% variation in the capital structure was due to changes in the asset structure as the findings of the adjusted R squared revealed. The asset structure variables were tangibility, Return on asset and the size of the firm. The correlation coefficient revealed that there was a positive relationship of 95.7% between the debt ratio and the independent asset structure variables. This means that the tangibility of assets, the size of the firm and the return on assets had an influence on capital structure. The findings also concluded that size of the firm and the returns on assets have a negative relationship with the capital structure. This means that an increase in either the return on assets or the size of the firm by one unit will lead to a decrease in the capital structure. It also emphasized the importance of asset tangibility. The asset tangibility and capital structure of the firm were positively related. The study recommends that firm should have a strong asset structure so that it would result to access to finances and eventually have a specific mix of debt and equity. In conclusion, asset structure has a positive relationship with the capital structure of a firm. This means that for a firm to have a strong capital structure, the asset structure cannot be ignored. Firms that require external financing therefore have to have a fairly large proportion of tangible assets so that the lenders can be confident that incase of forfeiture of payment of the loan, they can recover the money lent. This study will also improve the image of the firm in several ways: the managers will make informed decisions on either internal or external financing and it will also help investors when taking investment decisions.
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