Analysis of Debt Financing and Financial Performance of Listed Manufacturing and Allied Firms: Unbalanced Panel Approach

Abstract

Globally, the manufacturing industry is a crucial engine for sustaining economic growth and development. The sector’s contribution to Kenya’s economy has stagnated at around 10% of the gross domestic product (GDP), contributing an average of 10% from 1964-1973 and rose marginally to 13.6% from 1990-2007 and has been averaging below 10% in recent years. It however dropped to 8.4% in 2017. The renewed effort to revive the sector through the National Government Big 4 Agenda is expected to grow its contribution to GDP to 15% by 2022. Financing structure is imperative to maximize the company’s profitability and improve its competitiveness ability to realizing the National Government Medium Term Development Agenda. This study applied dynamic unbalanced panel analysis techniques using Secondary data for 10year period (2010 - 2019) with the study population comprising of 9 listed firms and hence census technique was adopted resulting to 86 observations. Document analysis guide was used to gather quantitative data from the firms’ financial statements. Focus was on debt financing. Pearson correlation was used to show the strength and direction of association among the variables. Short term debt financing was negatively and significantly correlated to Tobin Q; (r = -0.4790) and negatively correlated with LnEVA (r = -0.5032) giving negative and significant effect on performance as shown by the regression weights estimated by GMM. Long term debt ratio (LTDR) has a fairly moderate and positive correlation with Tobin Q (r = 0.4388). It is also strongly correlated with LnEVA ( r = 0.6570). The regression coefficients were also positive and significant for both performance proxies. The study recommended that the managers of MAFs need to minimize use of short time financing sources and concentrate on recovering cash flow quickly to minimize need for short term financing. Long term financing sources improve performance and need to be enhanced. Additionally, the government need to reduce the cost of borrowing Future studies can consider a balanced panel analysis and other panel data econometric techniques.

Keywords: Short term debt ratio, Long term debt ratio, Manufacturing and allied firms, performance

DOI: 10.7176/RJFA/13-3-04

Publication date: February 28^th 2022