Capital Structure and Financial Performance of Companies Listed Under Manufacturing and Allied Sector at Nairobi Securities Exchange, Kenya
Mutua, Lisy Marigu
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Capital structure is a prevalent subject that has continued to pose a challenge among the scholars in the field of finance and has increased remarkable attention since 1950’s. Capital structure is a word used to signify the composition of debt and equity that a firm uses to finance its operations. The capability of a firm to define its capital structure is a complex assignment to attain. The key sources that organizations may get their finances from are internal funding which are retained earnings, and the external funding which could either be equity or debt. Globally, the manufacturing and allied sector has had a major role in the development of the economy by motivating and supporting high industrious growth, enhancing employment prospects for semiskilled labor and constructing country competitiveness through exports. However, most of the developing countries have not been able to cultivate a strong manufacturing and allied sector. For instance, in Kenya, growth has mainly been determined by the agriculture and services sectors respectively. The manufacturing and allied sector’s contribution of Gross Domestic Product has remained stagnant with inadequate increases in the previous three decades, giving an average of 10% from 1964-73 and increasing slightly to 13.6% from 1990-2007 and averaging below 10% recently. Moreover, the Return on Equity and Return on Assets of most of the companies listed under Manufacturing and allied sector has been declining. The general objective of this study was to assess the capital structure and financial performance of companies listed under manufacturing and allied sector at Nairobi Securities Exchange, Kenya. The specific objectives that guided the study included determining the influence of retained earnings; long term debt; and equity on financial performance of companies listed under manufacturing and allied sector at Nairobi Securities Exchange, Kenya. Theories that were used to underpin the variables of the study were: pecking order theory, Modigliani and Miller theory of capital structure, trade off theory and the agency theory. Data was analyzed, findings and conclusions based on secondary data which was obtained from published and audited financial statements of the target population. The study employed descriptive research design while data was analyzed using multiple regression analysis. The target population of interest in this study comprised of all the eight companies listed under manufacturing and allied sector at the Nairobi Security Exchange, Kenya for a period of six years from 2013 to 2018 and a census of the companies was taken. Retained earnings and equity were concluded to have negative influence on financial performance of firms listed under manufacturing and allied sector in Kenya. Long term debt however, was concluded to have a positive impact on financial performance of firms listed under manufacturing and allied sector in Kenya as measured by both Return on Assets and Return on Equity. The study recommended that the management of manufacturing and allied sector should adopt strategies that ensured optimum capital structure. It was also recommended that companies listed under manufacturing and allied sector should come up with more investing strategies and products diversification so as to increase their proceeds and hence shareholders expectation to maximize value would be met.