Abstract
The astronomical transaction costs due to incomplete information and lack of economies of scale for SMEs contributed the failure of large portion of SMEs in Kenya. Unlike large corporations, transaction cost is a big component of SME expenses due to asymmetry of information and borrowing small amounts of fund at a time. Although virtual lending institutions reduced transaction cost by directly connecting the lender and the borrower, the interest rate charged by these institutions is higher than the mean profit rate for SMEs. The study used regression analysis, ANOVA, and correlation coefficient and the result indicated that transaction cost explained 22.8% of variations in market value (R<sup>2</sup>=0.228), f(6, 205)=2.181, p< .05, ROA explained 18.0%, (R<sup>2</sup>=0.180), f(6, 204)=2.904, p< .05, while sales growth explained 14.7% (R<sup>2</sup>=0.147), f(6, 206)=1.471, p=> .05. It was found that transaction cost was significant in predicting market value and ROA, and null hypotheses were rejected. The correlation result showed that transaction cost was negatively and significantly correlated with SME performance r(210)=-0.363, p<0.05.
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