Financial Leverage and Financial Performance of Agricultural Co-Operative Societies in Kiambu County, Kenya
Loading...
Date
2020-11
Authors
Omondi, Anne Amondi
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
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.
Description
A Thesis Submitted to the School of Business in Partial Fulfilment of the Requirements for the Award of Degree of Master of Science (Finance) of Kenyatta University.November,2020
Keywords
Financial Leverage, Financial Performance, Agricultural Co-Operative Societies, Kiambu County, Kenya