Capital Structure and Financial Performance of Kenya Tea Development Agency Processing Factories in Nyeri County, Kenya
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Date
2025-11
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Kenyatta University
Abstract
Globally, save for China, the tea industry has faced a significant market decline. The
general performance of the Kenyan tea industry posted mixed results, but more often
demonstrated a declining trajectory. The financial performance of the tea factories, as
shown by profitability metrics and dividend payout ratios, indicated a decline. Group
financial results put the dividend payout ratio at 14% in 2020, 12% in 2021, 10.5% in
2022, and 11% in 2023. Prudent and well-researched financing decisions have the
potential of optimizing the benefits accruing from consumption of funds while
minimizing the risks involved. The study sought to establish the effect of capital structure
on the financial performance of tea factories in Nyeri County, Kenya. Specifically, the
study aimed to determine the effect of long-term debt, short-term debt, internal equity,
and external equity on the financial performance of Kenya Tea Development Authority
managed tea factories. Financial performance was assessed using the dividend payout
ratio, an insightful profitability metric. The study used a causal research design. The study
employed the census method, which involved collecting data on all six Kenya Tea
Development Authority-managed tea factories in Nyeri County. The study relied on
secondary data collected from all six tea factories for the period 2013 to 2022, making a
total of 60 observations. The data was quantitative in nature. Panel regression analysis
was used for the time series data. Descriptive and inferential statistics were used for
analysis. The descriptive statistics included means and standard deviations. Diagnostic
tests were carried out to test the assumptions in the study. The researcher was guided by
Kenyatta University ethical codes when collecting, analyzing, and citing the literature.
The findings indicated that short-term debt had a positive coefficient of 0.076 with a
highly significant p-value of 0.001, suggesting that increasing short-term debt positively
affects firm performance, likely due to its flexibility and lower interest costs. Internal
equity also had a positive and significant effect, with a coefficient of 0.081 and a p-value
of 0.006, highlighting that retained earnings are a valuable financing source, supporting
stability without increasing debt obligations. External equity showed a positive effect as
well, with a coefficient of 0.054 and a p-value of 0.034, implying that funding from
external investors contributes to firm performance by providing capital without
immediate repayment, thus enhancing reinvestment capabilities. Conversely, long-term
debt presented a positive but statistically insignificant coefficient of 0.064 (p = 0.287),
indicating that it does not play a substantial role in enhancing performance, potentially
due to higher interest costs and repayment terms that may counterbalance its benefits.
These results underscore that short-term debt, internal equity, and external equity are
effective financing sources for Kenyan tea factories, while long-term debt may be less
critical, reflecting the industry’s preference for financing methods that support liquidity
and flexible growth.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of Degree of Master of
Business Administration of Kenyatta University. November, 2025
supervisor
Farida Abdul