Influence of Capital Structure on the Financial Performance of Kenya Tea Development Agency Tea Manufacturing Firms in Kericho and Bomet Counties, Kenya

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.