THE EFFECT OF CAPITAL STRUCTURE GEARING LEVELS ON FINANCIAL PERFORMANCE OF PUBLIC AND PRIVATE SECTOR FIRMS IN KENYA’S COASTAL COUNTIES

Abstract

Many firms were set up in Kenya to produce goods and services for consumption in Kenya and beyond. Some were set up in Kenya’s coastal counties after independence. As at June 1990 however, most them had either collapsed, liquidated, were ailing and few were performing fairly. By 2015, there were 194 public firms which were in operations and most of them had poor financial performance as measured by accounting and market ratios (ROE and ROA). In the small enterprise segment, about 300,000 SME’s were set up in 2010 to 2012.About 96% of them had closed down by the end of their first year in operations. The questions were ‘why did firms underperform and why did these firms fail? ’. Published annual financial reports of firms attributed the poor financial performance and failure to many factors; high cost of energy, intense competition, high cost of raw materials, obsolete equipment, poor management, poor technical skills, high cost of finance and other bank charges, inadequate finance, family feuds, lack of succession plan etc. Some studies attributed poor financial performance and failure of firms to financing; the capital structure. None however attributed this to capital structure gearing levels which constituted a research gap to be filled by this study to add to the body of knowledge and literature. The capital structure gearing level is the proportion of external finance used in financing a firm. This proportion (gearing) may vary between ›0 to 100% .Some firms however have a proportion ranging between ›0 and <30% (LG), 30%-‹35% (MG1) ≥35%-‹40% (MG2) ≥40%-≤60% (MG3) and ›60 % (HG). The external finance may be inform of short term and long term debt and equity finance. Debt carries a fixed slice of earnings. High gearing (HG) will magnify the effect on earnings and hasten the process of insolvency .Poor financial performance and failure therefore maybe the result of inappropriate gearing level. This study sought to do the following: (i).Assess the capital structure of public and the private sector firms in Kenya’s coastal counties. (ii).Assess the capital structure gearing levels of public and private sector firms in Kenya’s coastal counties. (iii).Determine the effect of the capital structure gearing levels on financial performance of public and private sector firms in Kenya’s coastal vi counties. This involved a target population of 500 productive firms in Kenya’s Coastal Counties. Using the Cochran’s sample size formula, 50% proportion of the productive public and private sector firms randomly selected, the sample was 139 firms. They were observed for a period of 2003 to 2015.Questionnaires and structured interviews were used as instruments for collecting primary data from finance officers or finance managers or their equivalent of the firms. Secondary data was obtained from financial statements. Control variables were; size, tangibility and growth. Data analysis was done using both descriptive statistics and inferential statistics (regression). The results showed that majority of the firms in Kenya’s coastal counties used capital structure composed of short term debt financing, this implies that firms should go for capital structure with a higher component of long term finance. The firms had affinity for gearing and more affinity for higher gearing levels of over 30% whereas the optimum gearing level should be between 30% to less than 35%.Firms in the Kenya’s coastal counties should avoid higher gearing levels for better financial performance. Key Terms: Capital Structure, firms, Public Finance, Private Finance, Public Sector, Private Sector, Gearing, Poor financial performance etc