Effect of Financial Structure on Financial Performance of Firms in the Construction and Allied Industry Listed at the Nairobi Securities Exchange in Kenya

Abstract

Purpose: This study sought to establish the effect of financial structure on financial performance of firms in the construction and allied industry listed at the Nairobi Securities Exchange in Kenya. Equally important was to establish the effect of ordinary share capital, determine the effect of retained earnings, examine the effect of long term debts, and establish the effect of short term debts listed at the Nairobi Securities Exchange in Kenya.

Materials and Methods: The study adopted a Census Research Design. The target population of the study was all the 5 firms’ listed under the Construction and Allied Sector of NSE. Therefore, a census method was adopted for this study where all the 5 firms listed under the Construction and Allied Sector of the NSE will participate in the study. Secondary data was used in the study and data collection instrument was used. Quantitative data analysis methods which are descriptive analysis method and inferential analysis method were used. The data collected was analysed using Stata version 13. To ascertain the relationship between financial structure and financial performance, a multivariate regression analysis was adopted on all the variables.

Results: The study found that share capital, retained earnings and short term debts significantly affected the financial performance of listed construction and allied firm in Kenya while long term debt had a negative and insignificant effect on ROE. Only retained earnings positively affected ROE of listed construction firms in Kenya. The study concluded that financial structure is very critical to the financial performance of firms, therefore at every stage firms must determine the mode of financing that will have the highest effect on financial performance.

Recommendations: The study recommends that management of listed construction and allied firms should not rely predominantly on ordinary share capital as the main source of financing. On retained earnings, the study recommends that management of listed firms should consider retained earnings as the first priority in their financing structure. On long term debts, the study recommend that management of listed firms should least prioritize long terms debts since it is expensive form of financing and should only be considered as a last resort or for high potential investment opportunities. On short term debt, it is imperative for management of firms to keep their short term debts as low as possible since these debts negatively affect the performance.

Keywords: Retained Earnings, Share Capital, Short Term Debt, Long Term Debt, and financial performance.

DOI: 10.7176/RJFA/12-18-04

Publication date:September 30^th 2021