Robby Tabitha Akinyi
Robby Tabitha Akinyi
School Of Business & Economics
RESEARCH TOPIC:
Mediating Role Of Financial Leverage On The Effect Of Firm Size On Financial Performance Of Sugar Firms In Western Kenya Region
ABSTRACT:
Sugar firms in Kenya have been facing operating challenges and frequent closures contrary to other global players. During March 2008 to March 2018, Brazil topped sugar producers globally with an average of 53% profit after tax. India came second continentally with 42% profit after tax, while regionally South Africa topped with 28% average after tax profit. However, Kenya achieved -24% average profit after tax. Theoretical literature presupposes the influence of firm size and financial leverage on financial performance, with a possible mediation of financial leverage on firm sizefinancial performance relationship. The available literature on Kenyan sugar firms focused on corporate governance, non-diversification and trade liberalization. However, there was lack of information on the relationships between; firm size and financial performance and firm size and financial leverage. Empirical literature revealed inconsistencies in the relationship between financial leverage and financial performance. The study done on Kenyan sugar firms was based on retrospective research on three sugar firms hence subject to biased results. Previous studies used firm size as a moderating variable between financial leverage and financial performance relationship, but none used financial leverage as a mediating variable on firm size and financial performance relationship. This study sought to analyse the mediating role of financial leverage on the effect of firm size on financial performance of sugar firms in Western Kenya. Specifically, the study sought to determine the effect of; firm size on financial performance, firm size on financial leverage, and financial leverage on financial performance and to establish the influence of financial leverage on the relationship between firm size and financial performance of sugar firms in Western Kenya. The study was anchored on the theories of; economies of scale, tradeoff, pecking order and the theories of ROA an ROE. The study adopted correlational research design on a population of 8 sugar firms in Western Kenya sampled using saturated sampling technique. The study used secondary Panel balanced data for March 2008-March 2018 comprising 80 data points, obtained from the various firms’ financial statements and Kenya Sugar Board. Panel co-integration tests estimating the long run co-integration relationship and Unit root on the data revealed stationarity of the study variables with p-value<0.05. Findings from panel multiple regression established a significant positive effect of firm size on financial performance (R2=.153, p=.0001), (coeff=.557), a significant negative effect of firm size on financial leverage (R2=.1322, P=.0002) (coeff= -.2819), a significant negative effect of financial leverage on financial performance (R2 =.1290, p=.0001) (coeff= -.0765). Findings revealed a significant mediation effect of financial leverage on the relationship between firm size and financial performance of the sugar firms of Western Kenya (R2 =.2017, p=.000) with a change in predictive power of 4.9% (.2017-.153). The study concluded that firm size positively predicted financial performance, whereas financial leverage negatively predicted financial performance. Financial leverage mediated in the relationship between firm size and financial performance of sugar firms in western Kenya. The study recommended the expansion of the sugar firms to tap the benefits resultant from economies of scale, reduction of the financial leverage levels of the sugar firms to within the optimal levels. This thesis may inform management of the Kenyan sugar firms, scholars and policy makers.