Abstract:
The choice, whether equity or debt financing, has led to an ongoing debate for the most effective capital structure. The study aimed to examine the capital structure and financial performance of agricultural firms listed in the Nairobi Securities Exchange using dividend policy as the moderator. Capital structure, the independent variable, was assessed through measures such as debt, share capital, and retained earnings. Financial performance, the dependent variable, was evaluated using return on equity (ROE). The study relied on secondary data drawn from six agricultural firms listed on the NSE over the period from 2013 to 2022. Data analysis was conducted using R-Programming to explore the connections among the key variables. The moderating effect of dividend policy was tested using the stepwise regression technique by employing a Three-step approach by Baron and Kenny (1986). Finally, the study used the bootstrapping method to approximate the panel regression model owing to the presence of normality problem. The results of the study revealed that 21% and 23% of the changes in the dependent variable can be well explained by the predictor variables without moderating variable and with moderating variable respectively. From the study, Debt was found to have a negative insignificant effect on ROE. Share Capital exhibited a negative and significant effect on ROE and Retained Earnings showed a positive and significant effect on ROE. The moderating variable, dividend decisions have no significant effect on the relationship between capital structure and ROE. This study recommends that agricultural firm management should utilize Retained Earnings, which is also the cheapest source of capital and most convenient.
