Financial Leverage and Financial Performance of Agricultural Co-Operative Societies in Kiambu County, Kenya
Omondi, Anne Amondi
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Financial leverage decisions are critical since they significantly explain firm financial performance. There is lack of consensus (from empirical literature) in respect to the nature and strength of relationship between firm financial leverage and financial performance. Moreover, the impact of financial leverage on different measures of financial performance is varied. Most agricultural co-operative societies in Kenya have not achieved their potential due to poor financial performance. In Kiambu County, the poor performance has in some instances led to farmers abandoning their trade all together and instead converting their land into real estate projects. Hence, this study assessed the effect of financial leverage on financial performance of agricultural co-operative societies in Kiambu County, Kenya. Specific objectives of the study were: to determine the effect of capitalization mix, degree of interest coverage and degree of asset coverage on financial performance. Additionally, the study evaluated the moderating effect of corporate governance on the relationship between financial leverage and financial performance. The study is anchored on agency, pecking order and trade off theories. Positivism research philosophy and explanatory research design were adopted. The study adopted a census of 25 active registered agricultural co-operative societies in Kiambu County. Secondary data was extracted from the annual reports and audited financial statements; Data was obtained from the Directorate of Co-operatives office in Kiambu for the period 2013-2017. Data was analyzed using panel regression analysis, Pearson simple correlation and Descriptive statistics; data was presented in tables and figures. Diagnostic tests performed include: Normality, Multicollinearity, Autocorrelation, Heteroscedasticity, Stationarity and Test for fixed or random effects. The study found that degree of interest coverage has a significant positive effect on financial performance; (β = 2.01937; P = 0.015). Degree of asset coverage also had a positive but insignificant effect on financial performance (β = 1.174203; P = 0.063). The relationship between capitalization mix and financial performance was negative and significant; (β = - 0.2589299; P = 0.040). Additionally, the study found that the relationship between financial leverage and financial performance was significantly moderated by corporate governance factors; (β = 0.9821695; P = 0.000). Hence, the study recommends that managers of Agricultural Co-operative Societies in Kiambu County, Kenya should formulate optimum debt-equity mix strategies as well as avoid over-reliance on debt since increase in the proportion of debt may increase financial risk leading to poor financial performance. Further, the study recommends that co-operative societies should consider cheaper sources of finance that do not deplete the firms’ earnings. Finally, the study recommends the consideration of corporate governance factors (Annual General Meetings and Internal Audit Committees) by Agricultural Co-operative societies to oversight financial reporting processes, internal controls and conformity with stipulated regulations in order to enhance financial performance.