The relationship between capital structure and financial performance of real estate firms in Kenya

Abstract

This study sought to determine the relationship between capital structure and financial performance of real estate firms in Kenya. Financing and investment are two major decision areas in a firm, how an organization is financed is important to both the managers of the firm and the providers of funds. Capital structure has been a major issue in finance ever since Modigliani and Miller showed in 1958 that capital structure decision of the firm is irrelevant – under perfect market assumptions. Whether or not an optimal capital structure exists is one of the most important and complex issues in corporate finance. If a wrong mix of finance is employed, the performance as well as the survival of the firm may be seriously affected. This study was guided by the study objective which was to establish the relationship between capital structure and financial performance of real estate firms. This was achieve by analyzing the relationship between financial performance measured by return on asset (ROA) with capital structure measured by total debt, Short term debt and long term debt. The study focused on a sample size of 28 real estate firms and collected data for 5 years from the annual reports of the firms. The type of data collected include return on asset, long term debt, short term debt and total assets; size of the company was measured by natural logarithm of total assets, while growth was measured by the change in total assets. Correlation and regression analysis was used to establish the association and effect of the variables under study. The research design that was adopted for this study was a descriptive research design. This type of design involves an extensive well focused literature review and identification of the existing knowledge gap. The data was then analysed using Statistical Package for Social Sciences (SPSS) and presented in tables. The researcher preferred SPSS because of its ability to cover a wide range of the most common statistical and graphical data analysis. An analysis of the mean shows that the sample of real estate firms prefer long term debt compared to short term debt. The mean of long-term debt was 4.864 and that of short-term debt was 0.721. The study finds that total debt has a negative relationship with financial performance. The study also reveals that long-term debt and shortterm debt is positively related to return on assets (ROA). The study found out that the adjusted r squared was 0.321. The study found that the standardized coefficient was 0.416, 0.422 and 0.223 for total debt, long-term debt and short-term debt respectively. This study concludes that capital structure has a moderately positive impact on financial performance of real estate firms in Kenya for the period under study. This study therefore recommends that real estate firms in Kenya should reduce the debt levels in their capital structure for a better performance.