Abstract:
The study sought to determine the effect of changes in capital structure on the financial performance of KTDA tea
processing factories in Bomet and Kericho Counties in Kenya over a period of five years from 2008/2009-2012/2013.
The capital structure indicators were short –term debt, long- term debt and total debt to total assets, and total debt to
total equity while financial performance was measured using Return on Equity (ROE). Previous studies that had
been conducted had focused on mostly listed companies leaving the manufacturing sector largely unexplored. The
analysis was based on panel fixed effect regressions. The results indicate that capital structure has significant effect
on ROE of tea processing factories. Long term debt was found to have insignificant and positive influence on the
financial performance of the tea processing firms. Short term debt on the other hand was found to have a negative
significant influence on firm performance. This means that for intervention in tea processing factories financial
performance, long term debt and total debt are important factors as they lead to better performance. However, critical
considerations need to be made regarding the use of short term debt since short term debt was found to have significant
negative influence on financial performance as indicated by ROE.
