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

Highlights

  • Over the past decades, the world has with devastating effects witnessed numerous cases of business failure linked to financial structure and subsequent failure among globally reputed corporations such as Delta Air Lines, Enron and WorldCom represented the icons of corporate financial stability prior to filing for bankruptcy and that was linked to the problem of financial structure (Outecheva, 2010)

  • The study results show that the average ordinary share capital for listed construction and allied firms on NSE was Kshs 9,081,580

  • The findings implied that capital contribution of shareholders/owners of the listed construction and allied firms varied across different firms

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Summary

Introduction

The world has with devastating effects witnessed numerous cases of business failure linked to financial structure and subsequent failure among globally reputed corporations such as Delta Air Lines, Enron and WorldCom represented the icons of corporate financial stability prior to filing for bankruptcy and that was linked to the problem of financial structure (Outecheva, 2010). Financial structure is a combination of a company's debt and equity that is used by a firm to finance its overall business operations and growth (Abor, 2005). It refers to the sources of funds from either the investors or the debts. After many years of debate most finance theorists are in agreement that an optimal financial structure should exist for firms and if so, how can it be determined (Eiteman; Stonehil & Moffett, 2007). Eiteman et al, (2007) further acknowledges that traditionalist and Modiglian & Miller school of thought has apparently ended in compromise

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