Moderating Effect of Firm Characteristics on the Relationship Between Capital Structure and Financial Performance of Medium-sized and Large Enterprises in Kenya

Abstract

The purpose of this study was to establish the moderating effect of enterprise characteristics on the relationship between capital structure and financial performance of medium-sized and large enterprises in Kenya. The study drew on secondary data consisting of audited financial statements from 60 large enterprises listed at the NSE and 30 medium-sized enterprises totaling to 90 enterprises for six year period (2011 to 2016). The objective of the study was to establish the moderating effect of enterprise characteristics on the relationship between capital structures and financial performance of medium-sized and large enterprises in Kenya. SDTAR, LDTAR and TDTET represented capital structure proxies; ROE and ROA represented financial performance while size and age represented enterprise characteristics. The study was anchored on positivism paradigm and guided by the following capital structure theories: static trade-off theory, pecking order theory and free cash flow theory. Descriptive statistics and inferential statistics were used to analyze data. Multiple regressions were applied to establish the extent of the effect of enterprise characteristics on the relationship between capital structures and financial performance while Pearson correlation was used to ascertain the moderating effect of firm characteristics on the relationship between capital structure and financial performance. The hypothesis was tested using calculated F-value and the critical value of F. The study established significant positive moderating effect of enterprise characteristics on the relationship between capital structures and financial. However, size and age reduced the explanatory powers of accounting for the variability in ROE while they increased explanatory powers for ROA. In conclusion the study found that decrease in ROE and increases in ROA were attributed to change in size and age. In improving financial performance it was recommended that enterprises invest in easily re-locatable and quality. Future studies to investigate other factors that account for variability in financial performance and other enterprise characteristics of medium-sized and large enterprises in Kenya.

Keywords: capital structure, enterprise characteristics, financial performance