Effect of Firm Size on Financial Leverage of Firms: A Study on Kenyan Sugar Firms in Kenya

Abstract

Sugar firms in Kenya have been facing challenges of operation and frequent closures unlike other global players. Miwani Sugar went under receivership in 2000 whereas Mumias sugar closed down in 2017 both being unable to meet their financial obligations.Report from the Kenya sugar Board portray The report by the departmental committee on Agriculture, Livestock and Co-operatives as presented by the Kenya National Assembly, Eleventh Parliament, third session (2015) raised an alarm on the crisis facing the sugar industry in Kenya and the imminent collapse of the sugar industry in western Kenya depicting these firms to be debt laden and unable to meet their short-term and long term financial obligations. Kenya Sugar sub-sector contributes for 7.5% to the National GDP and 15% to the Agricultural GDP. Previous studies concentrated on the effect of financial leverage on the financial performance of these sugar firms. However, there was lack of information on the relationship between firm size and financial leverage level of these sugar firms. Specifically, the study sought to determine the effect of firm size on financial leverage of sugar firms in Western Kenya. The study was anchored on the pecking order theory. 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 June 2008-June 2018 comprising 80 data points. These were 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 negative effect of firm size on financial leverage (R²=.1322, P=.0002) (coeff= -.2819). The study concluded that firm size negatively predicted financial leverage among sugar firms in Kenya. The study recommended the expansion of the sugar firms to tap the benefits resulting from economies of scale which will in turn help in the reduction of the financial leverage levels of the sugar firms to within the optimal levels. This thesis intends to inform management of the Kenyan sugar firms, policy makers and scholars.