Financial Leverage and Performance of Agricultural Cooperative Societies in Kiambu County, Kenya

Abstract

Financial leverage decisions are critical to firm performance, yet empirical studies lack consensus on the nature and strength of the relationship between financial leverage and financial performance, with varying impacts depending on performance measures. In Kiambu County, Kenya, poor financial performance among agricultural co-operative societies has hindered potential growth, prompting some farmers to abandon agriculture for real estate ventures. The research examined the effect of financial leverage on financial performance among 25 active agricultural co-operatives in Kiambu County, focusing on capitalization mix, interest coverage, and asset coverage as the independent variable measures. Grounded on the trade-off, pecking order and agency theories, this research adopted a positivist philosophy and utilized an explanatory research design. The analysis of secondary data (2013–2017) from audited financial statements and the Directorate of Co-operatives was conducted through the application of panel regression, descriptive statistical methods and correlation techniques. Diagnostic tests included normality, multicollinearity, autocorrelation, heteroscedasticity, stationarity, and effects modeling. Results revealed a significant positive effect of interest coverage (β = 2.01937; P = 0.015) and a positive but insignificant effect of asset coverage (β = 1.174203; P = 0.063) on financial performance. Capitalization mix negatively affected performance significantly (β = -0.2589299; P = 0.040). Based on the study findings, managers should formulate optimal debt-equity strategies, reduce reliance on debt to mitigate financial risks and explore cheaper financing options to improve financial performance.

Keywords: Financial Leverage, Agricultural Co-operative Societies, Asset Coverage ratio, Capitalization Mix, Economic Value Added, Financial Performance