MODERATING EFFECTS OF FIRM CHARACTERISTICS ON THE RELATIONSHIP BETWEEN FINANCING SOURCES AND FINANCIAL PERFORMANCE OF MICRO SMALL AND MEDIUM ENTREPRISES, IN NAKURU COUNTY, KENYA

Abstract

Micro, Small and Medium Enterprises (MSMEs) are important drivers of economic development in many countries and thus is a medium of job creation and poverty alleviation. MSMEs financial performance is enhanced by access to equity financing, debt financing and government financing programs which is affected by underlying factors such as inadequate finance, political interference, poor market accessibility, size and low entrepreneurial knowledge. In Nakuru County MSMEs are affected by inadequate funding, political interference and market expansion. It is with this regard that the study sought to explore the moderating effects of firm characteristics on the relationship between sources of finance and the financial performance of MSMEs in Nakuru County, Kenya. The specific objectives were to determine the effect of equity finance sources, the effect of debt financing sources, the effects of government financing programs and the moderating role of firm characteristics on the relationship between equity financing sources and MSME’s financial performance, debt financing sources and government financing programs and MSME’s financial performance. The study was informed by pecking order theory, the trade-off theory and the financing life cycle of the firm theory. The study employed an exploratory research design which assisted in employing questionnaire as a research instrument. The study employed stratified and simple sampling methods. The target population was 7,384 MSMEs in Nakuru County out of which a sample size of 379 was selected. Validity was tested using Rasch measurement model and reliability was tested using Cronbach Alpha where a value ≥ 0.7 was considered reliable. Likert scale of 5 points also was employed to test content validity and a pilot study of 37 MSMEs in Eldoret town was done. Data analysis was enhanced by the use of SPSS Version 23 and presentation employed bar graphs, tables, explanation and pie charts. The data was analyzed through hierarchical linear regression model. The direct effects findings were that equity financing had a positive and significance effects (β=0.147, PV=0.008), debt financing sources had a negative and no significance effects (β=-0.039, PV=0.521), government financing programs had a direct positive and significance effects (β=0.33, PV=0.000) and firm characteristics had a positive and significance effects (β=0.182, PV=0.000) on financial performance of micro, small and medium enterprises in Nakuru County. Firm characteristics were found to have positive effects and significance moderating effects on the relationship between equity financing sources and MSMEs financial performance (β=0.251, PV=0.000), firm characteristics had a negative and no moderating effects on the relationship between debt financing sources and MSMEs financial performance (β=-0.048, PV=0.632) and firm characteristics had a positive and no moderating effects on the relationship between government financing programs and MSMEs financial performance (β=0.006, PV=0.938). Therefore, MSMEs owners and managers should go for equity financing sources for the sources promotes higher profits hence high liquidity and as debt finance and government financing programs source increase, the profit also decreases. Also, management style and production capacity promote MSMEs financial performance. Furthermore, MSMEs in Nakuru should work on operations of the business for it negatively affects financial performance.