EFFECT OF COST OF CAPITAL ON FINANCIAL PERFORMANCE AMONG MANUFACTURING FIRMS IN KENYA
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Abstract
The objective of this study was to analyse the effect of cost of capital on financial performance of manufacturing firms in Kenya. The target population of the study being 741 manufacturing firms in Keya and a sample of 252 firms taken to be a representative of all manufacturing firms in Kenya. In order to collect data from the sampled respondents, cluster sampling was used to classify each of the twelve sub sectors into individual Stratas. Simple random sampling procedure was then used to select the sample in order to ensure each and every firm in the target population was represented. The study adopted a survey design that was descriptive in collecting data. A structured questionnaire was distributed targeting manufacturing firms in Kenya. Statistical analysis was done using correlation and multiple regression model in order to establish the linear relationships between one or more variables and to test the significance of the relationships between the dependent and independent variables. The data analysis was done using Statistical Package for Social Scientists (SPSS) version 24 to facilitate computation of descriptive statistics, multiple regression and Pearson correlation to get answers to the study questions. To test the hypothesis for this study, the independent variable was regressed against financial performance as the dependent variable. The key findings were that cost of capital had a positive influence on the financial performance of manufacturing firms. There was a significant positive relationship between cost of capital and manufacturing firm’s financial performance. Managers who were consulted about these results attributed the low explanatory power of variables to stiff competition, quality of the product and government policies. The key recommendations were that managers need to adopt the determinant of financial performance according to their firm requirements in order to improve performance. The study assists policy makers in coming up with better policies on improvement of financial performance.
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References
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Ahmad, Z. (2012). Capital structure effect on firm performance: focus on consumers and industrial sectors on Malaysian Firms. International Review of Business Research Papers, 8(6), 137-155.
Akhabonje, S., & Namusonge, G. S. (2016). Factors influencing access to credit by micro and small enterprises: A case of Kitale Town, Bungoma County. International Journal of Social sciences and Humanities Inventions 3 (10), 2904-17.
Aroni, J., Namusonge, G. S., & Sakwa, M. (2014) The effect of financial information on investment in shares - a survey of retail investors in Kenya. International Journal of Business and Commerce 3(8), (58-69).
Attar, A. (2014). Corporate strategy and capital structure: an empirical study of listed manufacturing firms in Saudi Arabia. PhD Thesis Brunel University.
Barney, J. (1991a). Firm resource and sustained competitive advantage. Journal of Management 17(1), 99
Beck, T., Demirguc-Knut, A., Levine R., & Cihak M. (2013). Financial Development and Structure Database. Journal of International Money & Finance, 13(6), 100-116.
Becker, E., & Huselid, A. (1997). High performance work systems and firm performance: a synthesis of research and managerial implications. Research in Personnel and Human Management. Greenwich: JAI Press, 16(13), 53-101.
Berk, J., DeMarzo, P. & Harford, J (2013), Fundamentals of Corporate Finance, 2. ed. edn, Prentice Hall, Boston, Mass.
Brigham, E., & Tzioums, K. (2015). Financial management: Theory and practice. New York. South-Western College.
Bunyasi, G., Namusonge, G. & Bwisa, H. (2014), Effect of entrepreneurial finance on the growth of small and medium enterprises in Kenya. European Journal of Business and Management 31(6), 2222-2839.
Capon, N., Farley, J., & Hoenig, S. (2012). Determinants of financial performance: A Meta-Analysis. Journal of Management Science, 36(10), 20-126.
Fama, F. & Kenneth R. (1992). The cross-section of expected returns. Journal of Finance, 46(3), 427-466.
Frame, W., Aruna S., & Lynn, W. (2001). The effect of credit scoring on small business lending. Journal of Money, Credit, and Banking, 33(3), 813-825.
Gang, F., Weilan, F., & Dan, L. (2012). Empirical study on financial risk factors: Capital structure, operation ability, profitability and solvency-evidence from listed companies in China. Journal of Business Management and Economics, 13(6), 296-342.
Gupta, P., & Srivastava, A. & Sharma, D (2013). Capital structure and financial performance: Evidence from India. Greater Noida. Gautama Buddha University press.
Huang, G., & Song M. (2002). The Determinants of Capital Structure: Evidence from China HIEBS (Hong Kong Institute of Economics and Business Strategy) Working Paper. Available at SSRN: http//ssrn.com/abstract=320088
Javed, B., & Akhta, S. (2012). Interrelationship between capital structure and financial performance, firm size and growth: Comparison of industrial structure in KSE. European Journal of Business and Management, 4(15), 148-157.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers, American Economic Review, 76(2), 323-329.
Kariithi, J., & Kihara, A. (2017). Factors Affecting Performance of Manufacturing Firms in Kenya: A Case of Harmaceutical Firms In Nairobi County. Strategic Journals(2), 817 – 836.
Karingi, B., Wanjala, J., Nyamunga, A., & Okello, E. (2014)., Tax reform experience in Kenya. Kenya Institute for Public Policy Research and Analysis, 13(1), 1-20
Kiaritha, W. (2015). Determinants of the financial performance of savings and credit co-operatives in the banking sector in Kenya, PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
Kihara, A. (2016). Influence of strategic contingency factors on performance of large Manufacturing Firms in Kenya, PhD project, Jomo Kenyatta University of Agriculture and Technology.
Kinyanjui, S. (2015). Response by Kenyan Manufacturing Manufacturing Firms to Globalization: A Survey of manufacturing Firms in Nairobi and Athi River in Kenya, PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
KNBS, (2010).Kenya Manufacturing Firms Survey. Nairobi:
Kung’u, J. (2015). Effects of Working Capital Management on Profitability of Manufacturing Firms in Kenya, PhD project, Jomo Kenyatta University of Agriculture and Technology.
Lee, J. (2013), “Does Size Matter in Firm Performance? Evidence from US Public Firms”,International Journal of the Economics of Business, 16 (2): 189-203.
Lyria, R., Namusonge, G. S., Kabare, K. (2017) The effect of talent attraction on organizational performance of firms listed in the Nairobi Securities Exchange. Journal of Human Resource and Leadership, 1(3), 18-30.
Mariana, S. (2012). The cost of capital, finance and high-tech investment International Review of Applied Economics 22(6), 693-705.
Memba, S. (2011). The Impact of Venture Finance on Performance of small and Medium Enterprises in Kenya. PhD Thesis. Jomo Kenyatta University of Agriculture and Technology.
Mlambo, C., & Biekpe, N. (2007). The efficient market hypothesis: evidence from ten African stock Markets; Investment Analysis Journal, 66(4), 5-17.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment, American Economic Review, 48(5), 261-297.
Mugenda, A. (2009). Social Science Research, Conception, Methodology and Analysis. Nairobi: Kenya Applied Research Training Service.
Myers, S.C., & Majluf, N.S (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial Economics, 13(6), 187-221.
Migiro, S. O (2013), Relating Kenyan manufacturing SMEs’ finance needs to information on alternative sources of finance, South African Journal Information Management, 8(1), 21-33.
Modigliani, F. & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 6(3), 261-297.
Mwangi, A. (2014). Domestic debt management. Effects of government borrowing on private credit. The case of Kenya. European Journal of Business and Management, 1(9), 76-84.
Mwirie, M & Birundu, M. (2015) The effect of capital structure on the financial performance of small and medium enterprises in Thika Sub-County. International Journal of Humanities and Social Science, 5(1), 151-157.
Namusonge, G, Biraori, O. and Kipicoech, E. (2014). Factors affecting tax compliance among small and medium enterprises in Kitale, Kenyan. International Journal of Recent Research in Commerce Economics & Management, 1(2), 60-75.
Nanagaki, L., & Namusonge, G. S. (2014). Factors influencing access to debt finance by micro and small enterprises: A case of Chwele Township, Bungoma County. International Journal of Scientific Research 12(1), 70-93.
Njeru, A.W., Namusonge, G.S. & Kihoro, J.M., (2012) Size as a Determinant of Choice of Source of Entrepreneurial Finance for Small and Medium Sized Enterprises in Thika District, International Journal of Business and Social
Njoroge, L. (2010). Determinants of financial performance in savings and credit cooperative societies in Nairobi: MBA Project, University of Nairobi.
Njuru, G., Ombuki, C., Wawire, N. & Okeri, S. (2013). Taxation and private investment: evidence for Kenya, International Journal of Economics and Management Sciences 2(11), 78-93
Ng’ang’a, P. N. (2017) Effect of Ownership Structure on Financial Performance of Companies Listed at the Nairobi Securities Exchange in Kenya. PhD project, Jomo Kenyatta University of Agriculture and Technology.
Nyabwanga, R. N., Ojera, P., Otieno, S. & Nyakundi, F. (2013). An empirical analysis of the liquidity, solvency and financial health of small and medium sized enterprises in Kisii Municipality, Kenya. European Journal of Business and Management, 5(8), 1-15.
Ojeka, S. (2013). Convenant University tax policy and growth of SMEs implications for the Nigeria: African Journal of Business Management, 6(21), 6379-6387.
Okelo, C. (2015). Determinants of financial risk of listed companies on the Nairobi Securities Exchange in Kenya. PhD project, Jomo Kenyatta University of Agriculture and Technology.
Okiro, O. (2014) Corporate governance, capital structure, regulatory compliance and performance of firms listed at the East African community security exchange. PhD project University of Nairobi.
Omar, N. (2014). Effects of Financial Planning on Business Performance: A Case Study of Small Businesses in Malindi, Kenya. International Journal of Research in Commerce, IT and Management, 4(11), 88-97.
Ongore, V. & Kusa, G, (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial issues, 3(1), 237-252.
Otieno, S. (2012). Influences of employee performance and strategy on performance of Kenya’s manufacturing firms operating under East Africa community regional integration. PhD project. Jomo Kenyatta University of Agriculture and Technology.
Polit, D., Becker, T., & Hungler, P. (2001). Essentials of nursing research: Methods, appraisal and utilization. (5th ed), Philadelphia. Lippincott Williams and Wilkins.
Porter, M. (1985). Competitive Advantage, New York. The Free Press.
Rissa, U, (2014) The growth of industrial manufacturing in Ethiopia and its contribution to GDP. MBA project, Addis Ababa University, Ethiopia.
Rotich, K. (2016). The effects of relationship banking and entrepreneurial orientation on financial performance of manufacturing firms in Kenya An unpublished PHD project. Jomo Kenyatta University of Agriculture and Technology.
Sabana, B. (2014). Entrepreneur Financial literacy, Financial access, transaction costs and performance of micro enterprises in Nairobi city county, Kenya. PhD Project University of Nairobi, Kenya.
Saleemi, N. A (2009). Entrepreneurship simplified. Nairobi: Saleemi publication ltd.
Saunders, M., Lewis, P., & Thornhill, A. (2012). Research Methods for Business Students (5th Edn). New Jersey: Prentice Hall.
Uzel, J. (2015) Effect of Strategic Management Drivers on the performance of the hotel industry in Kenyan Coast. PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
Wamiori, G., Namusonge G. S., & Sakwa, M (2016). Effect of access to finance on financial performance of manufacturing firms in Kenya. The Strategic Journal of Business & Change Management 3(23), 403-421
Wawire, N., Omondi. O. V., & Manyasa, E. (2014). Effect of tax reforms on buoyancy and elasticity of the tax system in Kenya: 1963-2010. International Journal of Business and Commerce, 3(21), 161-193).
Williams, J. (2012). Perquisites, risk, and capital structure, Journal of Finance, 42(6), 29-49.
Yassin, A., & Ahmed, S. (2012). Factors affecting the performance of Jordanian insurance companies listed at Amman stock exchange. Journal of Management Research, 4(3): 266-269.
Ahmad, Z. (2012). Capital structure effect on firm performance: focus on consumers and industrial sectors on Malaysian Firms. International Review of Business Research Papers, 8(6), 137-155.
Akhabonje, S., & Namusonge, G. S. (2016). Factors influencing access to credit by micro and small enterprises: A case of Kitale Town, Bungoma County. International Journal of Social sciences and Humanities Inventions 3 (10), 2904-17.
Aroni, J., Namusonge, G. S., & Sakwa, M. (2014) The effect of financial information on investment in shares - a survey of retail investors in Kenya. International Journal of Business and Commerce 3(8), (58-69).
Attar, A. (2014). Corporate strategy and capital structure: an empirical study of listed manufacturing firms in Saudi Arabia. PhD Thesis Brunel University.
Barney, J. (1991a). Firm resource and sustained competitive advantage. Journal of Management 17(1), 99
Beck, T., Demirguc-Knut, A., Levine R., & Cihak M. (2013). Financial Development and Structure Database. Journal of International Money & Finance, 13(6), 100-116.
Becker, E., & Huselid, A. (1997). High performance work systems and firm performance: a synthesis of research and managerial implications. Research in Personnel and Human Management. Greenwich: JAI Press, 16(13), 53-101.
Berk, J., DeMarzo, P. & Harford, J (2013), Fundamentals of Corporate Finance, 2. ed. edn, Prentice Hall, Boston, Mass.
Brigham, E., & Tzioums, K. (2015). Financial management: Theory and practice. New York. South-Western College.
Bunyasi, G., Namusonge, G. & Bwisa, H. (2014), Effect of entrepreneurial finance on the growth of small and medium enterprises in Kenya. European Journal of Business and Management 31(6), 2222-2839.
Capon, N., Farley, J., & Hoenig, S. (2012). Determinants of financial performance: A Meta-Analysis. Journal of Management Science, 36(10), 20-126.
Fama, F. & Kenneth R. (1992). The cross-section of expected returns. Journal of Finance, 46(3), 427-466.
Frame, W., Aruna S., & Lynn, W. (2001). The effect of credit scoring on small business lending. Journal of Money, Credit, and Banking, 33(3), 813-825.
Gang, F., Weilan, F., & Dan, L. (2012). Empirical study on financial risk factors: Capital structure, operation ability, profitability and solvency-evidence from listed companies in China. Journal of Business Management and Economics, 13(6), 296-342.
Gupta, P., & Srivastava, A. & Sharma, D (2013). Capital structure and financial performance: Evidence from India. Greater Noida. Gautama Buddha University press.
Huang, G., & Song M. (2002). The Determinants of Capital Structure: Evidence from China HIEBS (Hong Kong Institute of Economics and Business Strategy) Working Paper. Available at SSRN: http//ssrn.com/abstract=320088
Javed, B., & Akhta, S. (2012). Interrelationship between capital structure and financial performance, firm size and growth: Comparison of industrial structure in KSE. European Journal of Business and Management, 4(15), 148-157.
Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers, American Economic Review, 76(2), 323-329.
Kariithi, J., & Kihara, A. (2017). Factors Affecting Performance of Manufacturing Firms in Kenya: A Case of Harmaceutical Firms In Nairobi County. Strategic Journals(2), 817 – 836.
Karingi, B., Wanjala, J., Nyamunga, A., & Okello, E. (2014)., Tax reform experience in Kenya. Kenya Institute for Public Policy Research and Analysis, 13(1), 1-20
Kiaritha, W. (2015). Determinants of the financial performance of savings and credit co-operatives in the banking sector in Kenya, PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
Kihara, A. (2016). Influence of strategic contingency factors on performance of large Manufacturing Firms in Kenya, PhD project, Jomo Kenyatta University of Agriculture and Technology.
Kinyanjui, S. (2015). Response by Kenyan Manufacturing Manufacturing Firms to Globalization: A Survey of manufacturing Firms in Nairobi and Athi River in Kenya, PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
KNBS, (2010).Kenya Manufacturing Firms Survey. Nairobi:
Kung’u, J. (2015). Effects of Working Capital Management on Profitability of Manufacturing Firms in Kenya, PhD project, Jomo Kenyatta University of Agriculture and Technology.
Lee, J. (2013), “Does Size Matter in Firm Performance? Evidence from US Public Firms”,International Journal of the Economics of Business, 16 (2): 189-203.
Lyria, R., Namusonge, G. S., Kabare, K. (2017) The effect of talent attraction on organizational performance of firms listed in the Nairobi Securities Exchange. Journal of Human Resource and Leadership, 1(3), 18-30.
Mariana, S. (2012). The cost of capital, finance and high-tech investment International Review of Applied Economics 22(6), 693-705.
Memba, S. (2011). The Impact of Venture Finance on Performance of small and Medium Enterprises in Kenya. PhD Thesis. Jomo Kenyatta University of Agriculture and Technology.
Mlambo, C., & Biekpe, N. (2007). The efficient market hypothesis: evidence from ten African stock Markets; Investment Analysis Journal, 66(4), 5-17.
Modigliani, F., & Miller, M. (1958). The cost of capital, corporate finance, and the theory of investment, American Economic Review, 48(5), 261-297.
Mugenda, A. (2009). Social Science Research, Conception, Methodology and Analysis. Nairobi: Kenya Applied Research Training Service.
Myers, S.C., & Majluf, N.S (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial Economics, 13(6), 187-221.
Migiro, S. O (2013), Relating Kenyan manufacturing SMEs’ finance needs to information on alternative sources of finance, South African Journal Information Management, 8(1), 21-33.
Modigliani, F. & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 6(3), 261-297.
Mwangi, A. (2014). Domestic debt management. Effects of government borrowing on private credit. The case of Kenya. European Journal of Business and Management, 1(9), 76-84.
Mwirie, M & Birundu, M. (2015) The effect of capital structure on the financial performance of small and medium enterprises in Thika Sub-County. International Journal of Humanities and Social Science, 5(1), 151-157.
Namusonge, G, Biraori, O. and Kipicoech, E. (2014). Factors affecting tax compliance among small and medium enterprises in Kitale, Kenyan. International Journal of Recent Research in Commerce Economics & Management, 1(2), 60-75.
Nanagaki, L., & Namusonge, G. S. (2014). Factors influencing access to debt finance by micro and small enterprises: A case of Chwele Township, Bungoma County. International Journal of Scientific Research 12(1), 70-93.
Njeru, A.W., Namusonge, G.S. & Kihoro, J.M., (2012) Size as a Determinant of Choice of Source of Entrepreneurial Finance for Small and Medium Sized Enterprises in Thika District, International Journal of Business and Social
Njoroge, L. (2010). Determinants of financial performance in savings and credit cooperative societies in Nairobi: MBA Project, University of Nairobi.
Njuru, G., Ombuki, C., Wawire, N. & Okeri, S. (2013). Taxation and private investment: evidence for Kenya, International Journal of Economics and Management Sciences 2(11), 78-93
Ng’ang’a, P. N. (2017) Effect of Ownership Structure on Financial Performance of Companies Listed at the Nairobi Securities Exchange in Kenya. PhD project, Jomo Kenyatta University of Agriculture and Technology.
Nyabwanga, R. N., Ojera, P., Otieno, S. & Nyakundi, F. (2013). An empirical analysis of the liquidity, solvency and financial health of small and medium sized enterprises in Kisii Municipality, Kenya. European Journal of Business and Management, 5(8), 1-15.
Ojeka, S. (2013). Convenant University tax policy and growth of SMEs implications for the Nigeria: African Journal of Business Management, 6(21), 6379-6387.
Okelo, C. (2015). Determinants of financial risk of listed companies on the Nairobi Securities Exchange in Kenya. PhD project, Jomo Kenyatta University of Agriculture and Technology.
Okiro, O. (2014) Corporate governance, capital structure, regulatory compliance and performance of firms listed at the East African community security exchange. PhD project University of Nairobi.
Omar, N. (2014). Effects of Financial Planning on Business Performance: A Case Study of Small Businesses in Malindi, Kenya. International Journal of Research in Commerce, IT and Management, 4(11), 88-97.
Ongore, V. & Kusa, G, (2013). Determinants of financial performance of commercial banks in Kenya. International Journal of Economics and Financial issues, 3(1), 237-252.
Otieno, S. (2012). Influences of employee performance and strategy on performance of Kenya’s manufacturing firms operating under East Africa community regional integration. PhD project. Jomo Kenyatta University of Agriculture and Technology.
Polit, D., Becker, T., & Hungler, P. (2001). Essentials of nursing research: Methods, appraisal and utilization. (5th ed), Philadelphia. Lippincott Williams and Wilkins.
Porter, M. (1985). Competitive Advantage, New York. The Free Press.
Rissa, U, (2014) The growth of industrial manufacturing in Ethiopia and its contribution to GDP. MBA project, Addis Ababa University, Ethiopia.
Rotich, K. (2016). The effects of relationship banking and entrepreneurial orientation on financial performance of manufacturing firms in Kenya An unpublished PHD project. Jomo Kenyatta University of Agriculture and Technology.
Sabana, B. (2014). Entrepreneur Financial literacy, Financial access, transaction costs and performance of micro enterprises in Nairobi city county, Kenya. PhD Project University of Nairobi, Kenya.
Saleemi, N. A (2009). Entrepreneurship simplified. Nairobi: Saleemi publication ltd.
Saunders, M., Lewis, P., & Thornhill, A. (2012). Research Methods for Business Students (5th Edn). New Jersey: Prentice Hall.
Uzel, J. (2015) Effect of Strategic Management Drivers on the performance of the hotel industry in Kenyan Coast. PhD thesis, Jomo Kenyatta University of Agriculture and Technology.
Wamiori, G., Namusonge G. S., & Sakwa, M (2016). Effect of access to finance on financial performance of manufacturing firms in Kenya. The Strategic Journal of Business & Change Management 3(23), 403-421
Wawire, N., Omondi. O. V., & Manyasa, E. (2014). Effect of tax reforms on buoyancy and elasticity of the tax system in Kenya: 1963-2010. International Journal of Business and Commerce, 3(21), 161-193).
Williams, J. (2012). Perquisites, risk, and capital structure, Journal of Finance, 42(6), 29-49.
Yassin, A., & Ahmed, S. (2012). Factors affecting the performance of Jordanian insurance companies listed at Amman stock exchange. Journal of Management Research, 4(3): 266-269.