Financial performance of the firm draws attention not only from the government but also its management and shareholders. Financial performance as an outcome variable Richard et al. [94]; Santos and Brito [100] is used to gauge how well a firm utilizes its assets to generate revenue hence an indicator of financial health Brailsford et al. [18]. As a result, one of the key areas in the firm is investments inform of assets. Generally, the going concern of any firm depends on returns generated from investments Ryan and Ryan [98]. According to Financial Accounting Standards Board (FASB), assets comprise of tangible and intangible assets obtained and controlled for future economic benefit in the entity. Such assets are significant for enhancing corporate value and reducing risks Xu and Xu [122], affects firm’s survival Reyhani [91] and capital structure Campello and Giambona [21]; Koralun-Bereźnicka [66]. For investments that are capital in nature, the firm will manage well the scarce financial resources Bennouna et al. [13], achieve tradeoff between expected returns and risk, accelerate economic growth of the country Elumilade et al. [40], manage change strategically and enhance sustainable corporate performance Emmanuel et al. [41]. The firm’s asset structure is thus formed as a result of adverse allocation of resources Xu and Xu [122]. This important structure as pointed out by Reyhani [91] comprises of fixed and current assets.

In the 21^st century, corporate governance is a subject whose time has come as all corporate entities need proper governing Tricker and Tricker [114]. As a result, Tricker and Tricker [114] asserts that both advanced and advancing economies have introduced corporate governance codes as well as new company laws. In 1992, Cadbury Committee report recommended enhancement of corporate governance as the only technique to discipline the organization Cadbury [20]. According to Rajan and Zingales [87], corporate governance system of organization implements property rights structures, use of accounting standards, legal system that resolves disputes in contracts, protect consumers, promote competitive advantage and strengthen firm’s ownership structure. In Kenya, there is the code of corporate governance practices guidelines issued by the Capital Markets Authority (CMA) in 2002 for public listed companies. The code refers corporate governance as a process and structure to direct and manage the affairs of the company as to enhance its prosperity, accounting and realize shareholders’ long-term value. CMA code of 2015 however requires the boards to formulate additional internal policies and strategies of growing the company, protecting shareholders, stakeholders and community interests. Given their immense contribution in the firm, there is need to evaluate the structure of the board given assets, capital structure and financial performance. In a firm set up, corporate governance decisions rest on the Board of Directors (BOD) who are thus the governing body Tricker and Tricker [114]. In most cases, BOD in the company work around the clock to implement the strategic plans as to elevate financial performance. This is achieved through close monitoring and supervision of the management as well as making key decisions as investment, financing, dividends. Basing on this, corporate governance interferes with the investment decisions in form of assets which seek to improve firm’s financial performance in the long run.

Most assets in the firm are financed through use of debt, equity or a mixture of the two. According to the pecking order theory of capital structure by Myers and Majluf [79], internal finances are utilized first given investment before opting for debt, second option and equity as a last resort. For trade off theory proponents, the firm has to balance the costs and benefits when choosing between debt and equity finance Kraus and Litzenberger [68]. This calls for a serious investment appraisal to be done before opting for these two giant sources of finance (debt and equity) in a company. Failure to do so, many agency problems and conflicts may arise as advocated by agency theory. Hence, capital structure, a mix between debt and equity Modigliani and Miller [2,73,75,99] and investment decisions inform of assets are related. Notably, firms aim at driving financial performance which in this case depends on the availability of resources. Despite this, financial resource defined inform of capital structure must be considered especially if the firm wish to succeed in driving its performance given its asset structure. 

Construction and Manufacturing Sector in Kenya 

In most countries across the world, construction and manufacturing sectors are crucial given their contributions towards economy. First and foremost, Construction sector is currently regulated by the National Construction Authority (NCA) which was formed in 2011 after the National Construction Corporation (NCC) collapsed in 1987. This sector is the driver of economic growth given its contribution towards Gross Domestic Product (GDP) (Kenya Institute for public policy research and analysis (KIPPRA), 2017). However, the sector is handicapped by several challenges which mainly relate to corruption, quality assurance, poor productivity and shortage of skilled labor (NCA, 2018). Despite this, the sector has struggled to record a growth rate of 13.6% in 2015 compared to 13.1% in 2014 (KIPPRA, 2016). This was mainly attributed to infrastructure development and real estate sector expansion. In 2016, the growth rate declined to 9.2% from 13. 6% in 2015 and further declined to 8.6% in 2017 despite increase of credit to the sector of Kshs. 109.9 billion in 2017. Secondly, manufacturing sector on the other end contributes towards economic growth of most countries is in line with the Kaldorian economic growth model which affirms close relationship between manufacturing industry and Gross Domestic Product (GDP) growth. Kenya as an active member in both regional and international integration has high hopes with the manufacturing sector. The sector is closely regulated by Ministry of Industry, Trade and Cooperatives (MITC), government energy bodies, Kenya Revenue Authority (KRA), KenInvest, Kenya Bureau of Standards (KEBS), Export Processing Zone Authority (EPZA), Kenya Industrial Estates Limited (KIE) among others. In Kenya, 95% of manufacturing sector is dominated by Micro and Small Enterprises (MSEs) but contributes only 20% to sector’s GDP leaving the lion share (60%) to medium and large firms (KIPPRA, 2017). Despite this, the key manufacturing sections to spur economy in achieving structural transformation from lower to upper middle income by the year 2030 include agro-processing, textile, leather and construction (KIPPRA, 2017). Moreover, vehicle assembly, electronics and technology related manufacturing sectors are found to be complex and weak contributors. As a source of GDP growth, Kenya’s manufacturing firms contributed 6.3% (KIPPRA, 2017). Other than attaining the Vision 2030, manufacturing sector will help Kenya boost exports to increase her trade surplus and creation of employment.

Problem Statement

As to maximize profits and shareholders’ wealth, management of most listed firms including Kenya seek to answer the question; how to enhance financial performance of the firm in the 21^st century? In reality, there exists variation in performance reported by listed firms in Kenya. A few of the listed firms are top performing while the majority is falling on average performing and loss-making bracket. Indeed, most of the firms listed under construction and manufacturing sector in Kenya are not an exception. The study thus emphasized on financial management decisions that touch on investment and financing decisions. Moreover, at firm level, decisions regarding the identified ingredients lie with the top management. As a result, the general corporate governance which rests with the BOD is the key ingredients of boosting financial performance of construction and manufacturing firms in Kenya. Asset structure, corporate governance and capital structure continue to play a critical role in influencing financial performance of the firm. First and foremost from empirical studies, there have been on asset structure as to link it with firm’s performance Iqbal et al. [59]; Reyhani [91]; Kotšina and Hazak [67]; ( Xu and Xu [122]); Al-ANI [7]. Others studies have opted to examine the link between asset and capital structure Campello and Giambona [21]; Koralun-Bereźnicka [66]. Secondly, capital structure has been assessed in many studies on how it affects the performance Abor [2,4,38,56,72,80,88,109,116]. Lastly, corporate governance has attracted attention of significant number of researchers in the recent past. Some have examined corporate governance in general in relation to firm performance Kyereboah-Coleman [70,111] while others have linked it to capital [90]; Achchuthan and Rajendran [2]; Alagathurai [9,89]. Within the context of corporate governance, studies have specifically investigated the effect of board composition Ezzamel and Watson, [30,42,92,120] and board size Hermalin and Weisbach [33,29, 51,61].

Generally, from the empirical studies reviewed, there has been a tremendous contribution from the findings regarding asset structure, corporate governance and capital structure. However, to the best of the authors’ knowledge, the linkages between asset structure, corporate governance and capital structures with financial performance have not yet been addressed explicitly and modeled collectively in Kenya’s construction and manufacturing sectors. To address the gap, the study modeled corporate governance and capital structure to moderate the relationship between asset structure and financial performance of listed construction and manufacturing firms at the Nairobi Securities Exchange (NSE) in Kenya. This is because these listed firms are bigger, professionally managed with high turnover and asset value Ayot [12]. The findings of the study could help these largest and most sophisticated sectors in East Africa to spur their performance and thereby economic growth. The managers and other policy holders in the firm could utilize the findings of the study in devising policies, activities and strategies to improve performance in full view of interaction with board and capital structure. Therefore, to address the research gap, the study tested the following hypotheses:

H_o1:   There is no significant effect of asset structure on financial performance of construction and manufacturing listed firms in Kenya

H_o1a: There is no significant effect of noncurrent assets on financial performance of construction and manufacturing listed firms in Kenya

H_o1b: There is no significant effect of current assets on financial performance of construction and manufacturing listed firms in Kenya

H_o2:   There is no significant moderation effect of capital structure on the relationship between asset structure and financial performance of construction and manufacturing listed firms in Kenya

H_o2a: There is no significant moderation effect of capital structure on the relationship between noncurrent assets and financial performance of construction and manufacturing listed firms in Kenya

H_o2b: There is no significant moderation effect of capital structure on the relationship between current assets and financial performance of construction and manufacturing listed firms in Kenya

H_o3:   There is no significant moderation effect of corporate governance on the relationship between asset structure and financial performance of construction and manufacturing listed firms in Kenya

H_o3a: There is no significant moderation effect of corporate governance on the relationship between noncurrent assets and financial performance of construction and manufacturing listed firms in Kenya

H_o3b: There is no significant moderation effect of corporate governance on the relationship between current assets and financial performance of construction and manufacturing listed firms in Kenya

Literature Review

Theoretical Framework

In a company, there exist the shareholders whose aim is to maximize their wealth by all means. Shareholders look upon the managers as to realize their goal. According to agency theory, there exist conflicts between the interests of shareholders (principals) and managers (agents)  Jensen and Meckling [63]. As a means of enhancing monitoring and control, it calls for the need to separate ownership and control Fama and Jensen [43], use of board comprising more of independent directors from outside the firm and elimination of Chief Executive Officer (CEO) duality Cadbury [20]; OECD [81]. Contrary to agency theory, stewardship theory by Donaldson and Davis, [37] are of the opinion that managers are stewards who can be entrusted with the firm’s resources. Indeed, the proponents of this theory affirm the need to constitute boards with high proportion of inside as opposed to outside directors and also use of CEO duality. The two theories however seem to differ but aim at ensuring that resources of the firm utilized effectively and efficiently. Agency theory therefore underpins this study since through asset and capital structure, agency relationship is created between the shareholders, managers and debt holders. Stewardship theory on the other hand forms the basis of conceptualization of corporate governance given asset structure, capital structure and financial performance. As stewards, the board members are therefore entrusted to enhance monitoring and control not only to protect shareholders from potential manager’s conflicts of interest but also enhance utilization of resources, both assets and finances.

Asset Structure and Financial Performance

Each firm aims at making sound investment decisions as to revitalize their performance in the industry and sector at large. These decisions commit firm’s financial resources to both short- and long-term investments. The former refers to those investments vehicles the firm intends to hold for less than a year while the latter is held for more than a year. Capital budgets relate to planning of long-term investments which involve significant amounts of money in the company compared to short term investments. More caution is thus taken by managers when preparing and allocating funds in such budgets. From the word capital budgets, there emerges capital budgeting. According to Shah [102], capital budgeting evolvement started from early 1930s. The evolution was relating to capital budgeting in government. After going through several stages (first in early 1930s to sixth stage in late 1990s), capital budgets relating to long term investments have been applicable not only to the government but to other areas including companies. Despite the differences between long term and short-term investment, both constitute the asset structure of the firm. However, more resources need to be allocated towards long term investments Mwaniki and Omagwa [77] than short term investments. Therefore, asset structure was viewed to consist of noncurrent (long term or permanent) and current (short term) assets Koralun-Bereźnicka [66].

Asset structure has attracted attention from significant number of researchers in view of the firm’s performance. The key scopes of study have been listed firms Reyhani [7,77,91], banking [83,123] and manufacturing or industrial sectors Okwo et al. [82]; Ishmael and Kehinde [60]; Xu and Xu [122]. Among these studies, the effect of asset structure comprising of noncurrent and current assets collectively has been investigated. From the findings, it has been found that there exist a positive statistical relationship between investment in fixed assets and firm performance while current assets have no impact Xu and Xu [7,77,122]. Secondly, studies have found investment in fixed assets to have significant impact on firm performance Iqbal et al. [59,83,91]. As opposing to this finding, Okwo et al. [82] found investment in fixed assets lacking significant impact while Kotšina and Hazak [67] established a negative relationship with firm performance. Lastly from findings by Ishmael and Kehinde [60], current assets positively impact on firm’s profitability. Yahaya et al. [123], investment in current assets as financial assets held for trading, loans, advances to customers, cash and bank balances positively affect performance. For other category of current assets (derivative assets, loans and advances to banks), their impact on firm’s ROA is negative. The study thus sought to test H_o1; there is no significant effect of asset structure on financial performance of construction and manufacturing listed firms in Kenya.

Moderating Effect of Capital Structure 

Capital structure is associated with financing decisions in the firm. Hence, the mix between debt and equity was first described by described Franco Modigliani and Merton Miller, popularly known as MM in 1958. Debt represents a liability Ross et al. [96] which according to Swanson et al. [108] refers to a contractual arrangement between the firm and debt holder stating the principal, relevant interest and maturation date. Long term debt differs from short term debt as the former takes more than one year from the date of current balance sheet. Equity being the residual of the difference between total assets and total liabilities Ross [95] gives holders form of certain rights to determine overall direction of the firm and disposition of assets if the firm is dissolved Swanson et al. [108]. Through this form of capital, equity holders as residual claimants Jensen and Meckling [63]; Booth et al. [17] of which they can influence and monitor management’s decisions Kisgen [65]. Notably, capital structure decisions are complicated by perpetual changes in business environment Bubic and Susak [19] hence existence of several determinants of capital structure as highlighted by several scholars in 1970s and 1980s. Common determinants include transaction costs Titman and Wessels [113], collateral, non-debt tax shields DeAngelo and Masulis [34], growth opportunities Myers [78]; Jensen and Meckling [63], uniqueness of a firm, industry classification Titman [112], firms size Warner [119]; Ang et al. (11), costs of issuing debt and equity securities Smith Jr [107], profitability and volatility of operating earnings Myers and Majluf [79]. Among the capital structure determinants identified, there are those relating to assets characteristics of the firm. They include value of assets Ellili and Farouk [38], asset structure, tangibility of the firm Akhtar [6,49] and liquidity Morellec [74,105].

Given the debt equity mix and availability of growth opportunities, more equity than debt finance is required by the firm Jensen [62]. On the other hand, more debt than equity is used as firm matures Hovakimian et al. [55]; Frielinghaus et al. [45] or when it has more growth opportunities Datta et al. [32]. As result, more debt than equity signifies high financial leverage Ward and Price [118]. Regardless of the state of maturity, firms need finances to undertake various projects Chechet and Olayiwola [23]. In this case, a single source of financing is not reliable hence debt and equity are incorporated Chen [25]. Financial managers are tasked with establishing the optimum combination between debt and equity Akeem et al. [5] as wrong mix may seriously impact on firm’s performance Chinaemerem and Anthony [26]. Therefore, from the tradeoff theory of capital structure, there is need to balance different benefits and costs associated financing. With this in mind, capital structure plays an important role in performance of the firm based on its valuation Welch [121]. Therefore, a positive relationship existed between capital structure and firm performance Tarek Al-Kayed et al. [109] but more specifically if equity unlike debt financing is used Vătavu [116]. In addition, positive relationship between equity and long term debt on performance has been reported among listed firms Githire and Muturi [46]. In the study by Abor [2], there existed a significant positive relationship between total debt to total asset ratio and performance. Given capital structure and firm performance relationship, other studies have found negative Ahmed Sheikh and Wang [4]; Hull and Dawar [56]; Nassar [80], inverse Memon et al. [72,88], weak to no impact El-Sayed [38] and no impact absolutely [86]; Al-Taani [8].

Other than affecting performance of the firm, capital structure represents major claims to corporation assets Riahi-Belkaoui [93] and makes up the sources of corporate assets Pandey [84]. Generally, asset structure significantly affects capital structure Koralun-Bereźnicka [66] but to some extent, the relationship may be curvilinear Muscettola [76]. Moving away from the general view, many assets’ characteristics and capital structure relationship has yielded mixed results as evident from various studies. To begin with, a positive relationship exists between collateral value of assets and debt Hirota [6,53,110]. Contrary to these, Cornelli et al. [28] pinpoints negative relationship. Secondly, some findings indicate a positive relationship between liquidity of assets and debt financing Shleifer and Vishny [103 while study by Sibilkov [105] attained negative effect. Lastly based on tangibility of the firm, there exist either positive Frank and Goyal [44]; Charalambakis and Psychoyios [22]; Hall [49]; Campello and Giambona [21,106] and or negative relationship Harris and Raviv [50]; Morellec [74] in relation to firm’s capital structure. In studies relating to asset and capital structure relationship, capital structure has been the independent variable. Setiadharma and Machali [101] tested the mediating effect of capital structure given the relationship between asset structure and firm value. Given that capital structure interferes with the relationship between asset structure and financial performance, the study extended the existing literature by testing the hypothesis H_o2; there is no significant moderation effect of capital structure on the relationship between asset structure and financial performance of construction and manufacturing listed firms in Kenya.

Moderating Effect of the Corporate Governance 

Corporate governance of the firm especially in the 21^st century is becoming a household name across the world. It is evident that governance practices in the firm associated with financial management decisions and performance Andreou et al. [10]. Pointing out financial management, key decisions are made regarding financing, investment and dividend in the firm. First, corporate governance is associated with investment decisions in the firm. Adam Smith in 1776 while describing the wealth of nations referred company directors as ‘managers of other people’s money’. However, Fama and Jensen, [43] state that managers (agents) can deviate from shareholders’ (principals’) interests if there are no corporate governance controls. These managers have tendency to invest by undertaking projects that benefit themselves and aim in any way at maximizing shareholders’ wealth Jensen and Meckling [63]. To avoid this mess, agency theory emphasizes incorporation of non-executive directors on the BOD and discouraging CEO duality. Stewardship theory which is seen as extension of agency theory supports the use of non-executive BOD but encourage CEO duality and reduction of BOD size. While explaining the free cash flow hypothesis, Jensen [62] states that corporate managers are agents to increase the resources under their control for the firm to grow beyond its optimal size. As free cash flows (excess of that required to fund investment in all viable projects) increases, conflicts between managers and shareholders become severe. Hence, Jensen’s free cash flow hypothesis explains how debt can reduce these conflicts while motivating manager to avoid investing the excess cash on projects below cost of capital. 

Corporate governance plays a major role in revamping the structures and systems of organizations. These roles include reduction of agency conflicts by aligning organization’s and stakeholders goals Bhagat and Bolton [14], reduce control rights managers have, increase investment in viable projects Shleifer and Vishny [104], safeguard stakeholders’ interests Danielson and Karpoff [31], protect consumers, promote competitive advantage Rajan and Zingales [87]. Donaldson and Fafaliou [36] posit that good governance enhances investor confidence and improves liquidity in the market. Over time, corporate governance in a firm has been defined based on audit committees Thuraisingam [111], leadership structure Achchuthan and Rajendran [2] and corporate governance committee Andreou et al. [10]. Others include ownership structure [90]; Andreou et al. [10,97], CEO characteristics Alagathurai [9,97] and board Hossain et al. [2,9,54,89,90,97,111]. In the study, firm’s BOD is entrusted to make several key decisions on behalf of the firm. As a result, board structure was singled out because the board enforces corporate governance controls to prevent managers from deviating from shareholders’ interests Jensen and Meckling [63]; Fama and Jensen [43] but instead increase investments in positive Net Present Value (NPV) projects Shleifer and Vishny [104]. Basing on this, the corporate governance interferes with the direct nexus between assets structure of the firm and financial performance.

From empirical studies examining corporate governance from financing decision perspective, there exists a positive relationship between board size [90]; Alagathurai [9], board committee Achchuthan and Rajendran [2], board composition and CEO duality Alagathurai [9] and capital structure. Lastly from performance perspective, corporate governance positively affects the market value Black et al. [16]; Chen [24]. Rostami et al. [97] study found corporate governance aspects (ownership concentration, board independence, CEO duality and tenure) to positively affect performance unlike institutional ownership and board size which causes a negative effect. According to Hutchinson [57] and Thuraisingam [111], presence of non-executive directors in the board weakens firm’s performance while Gupta and Sharma [48] conclude that corporate governance limits financial performance. Moreover, board comprising of non-executive directors positively affect performance [92,120] which Agrawal and Knoeber [3] negates. Board composition has also been determined to have no substantive effect on performance Hermalin and Weisbach [52]; Dalton et al. [30]. Board size affects performance ranges from positive Dalton and Dalton [29]; Jackling and Johl [61]; Van den Berghe and Levrau [115] to negative Hermalin and Weisbach [51]; Andres et al. [33]. 

Figure 1: Conceptual Framework

Source: Researcher (2018)

Having seen corporate governance from investment, financing and performance perspective, the study sought to test the hypothesis (H_o3); there is no significant moderation effect of corporate governance on the relationship between asset structure and financial performance construction and manufacturing listed firms in Kenya (Figure 1).

The research was based on post positivist paradigm and explanatory research design as to understand and predict relationships between study variables. The target population comprised of 14 listed firms from 2008 to 2017 under construction and manufacturing sectors who have met the requirements given the listing rules at the NSE, Kenya. However, inclusion criteria were based on firms that have complete data for the entire study period. As a result, using document analysis of audited annual financial reports, panel data was collected from 12 listed firms.

Measurement of Variables

Independent Variable (Asset Structure)

Asset structure has been measured based on the values of current assets, long term investments, plant, property and equipment including other assets Pandey [84]. In study by Reyhani [91], asset structure is defined to consist of fixed and noncurrent assets. Setiadharma and Machali [101] defined assets structure using ratio of fixed assets to total assets in the firm. Asset structure has further been identified with components as financial assets, current investments, cash in hand and at bank, tangible, fixed and current assets Koralun-Bereźnicka [66]. Basing on the past studies, asset structure was measured based on the book values of current and noncurrent assets as reported in the audited financial statements for each company. However, to reduce disparities, the study determined the natural logarithm of the book values of current and noncurrent assets.

Dependent variable (Financial Performance)

Financial performance has been measured using Earnings Before Interest and Tax (EBIT) Reyhani [91], Earnings Per Share (EPS), current ratio Mwaniki and Omagwa [77] and profit margin Iqbal et al. [59]; Ishmael and Kehinde [60]; Mwaniki and Omagwa [77]. Other common indicators include Return on Assets (ROA) Kotšina and Hazak [67,7,123,77] and Return on Equity (ROE) Al-ANI [7]; Mwaniki and Omagwa [77]. Given that in listed firms shareholders are interested more on the returns, ROE (net income divided by shareholder’s equity) was adopted as an indicator of financial performance. 

Moderating Variable (Corporate Governance)

Organization for Economic Cooperation and Development (OECD) in 2004 termed corporate governance a system to direct and control corporations OECD [81]. Danielson and Karpoff [31] points out the existence of several relevant players hence need of corporate governance framework to control and safeguard their interests. Given that most decisions in listed firms are made by the board of directors, corporate governance was thus defined based on size as the key characteristic of the board. In the past studies, board size has been determined based on the number of directors in the company’s board Dalton and Dalton [29]; Jackling and Johl [61,90,89]. The study adopted the same measure of board size while investigating the moderating effect of corporate governance in the relationship between asset structure and financial performance among listed construction and manufacturing firms in Kenya.

Moderating Variable (Capital Structure)

Empirically, capital structure has been measured using debt equity ratio Setiadharma and Machali [101], capital asset ratio Tarek Al-Kayed et al. [109] and ratio of total debt, both short term and long term, to total assets Rajan and Zingales [38,80,87,88,116,]. Other studies have measured capital structure using the ratio of short term as well as long term debt to total assets El-Sayed [38,88,116] Borrowing from other studies, the study assessed capital structure based on debt equity ratio.

Control Variables

In this study, firm size and age were controlled while examining the relationships between variables. Naturally, large firms who have existed for several years are characterized by better performance, good reputation, ease accessibility to capital market and other opportunities. Firms are required enlarge their size as to comply with institutional environment requirements Jónsson [64]. Firm size as a determinant of capital structure positively affects the leverage of the firm Frank and Goyal [44]; González and González [47]; (Kurshev and Strebulaev, [69]. Given performance, firm size has also been found to have significant impact [35,71, 85,117]. Firm age as determined by number of years since incorporation positively affects performance Bhayani [15]; Coad et al. [27]; Ilaboya and Ohiokha [58]. Firm age was therefore measured based on the natural logarithm of number of years since listed while firm size was established through determination of natural logarithm of firm’s total assets.

Data Analysis Approach

First and foremost, descriptive statistics were handy in organizing and describing the data. These included the mean, standard deviation, minimum and maximum. Later, multiple regression analysis was conducted as to test the hypotheses. The regression models were as follows;

Direct effects with and without controls.

Model 1:

Moderating effect of Capital Structure.

Model 2: 

Model 3:

Moderating effect of Corporate Governance.

Model 4: 

Model 5:

where, AS (Asset Structure); NCA (Noncurrent Assets); CA (Current Assets); CS (Capital Structure); CG (Corporate Governance); FP (Financial Performance); FS (Firm Size); FA (Firm Age).

The main aim of this paper was to assess the moderating effect of capital structure and corporate governance given asset structure-financial performance linkage. However, prior to testing the stated hypothesis using multiple regression analysis, secondary panel data was analyzed descriptively in Table 1 using the mean, standard deviation (std. dev.), maximum and minimum. Moreover, diagnostics as well as panel unit root test was conducted as shown in Table 2 and 3 respectively.

Financial performance in Table 1 had a mean of 0.201 and standard deviation of 1.021 with maximum of 2.888 and minimum of -8.953. Maximum value indicated that listed firms were able to generate profits without the need of more capital from the shareholders. On the contrary, a negative minimum value was a clear indication that net income was negative. Current assets had a lower standard deviation (1.077) compared to that of noncurrent assets (1.574). Hence, book values of current assets were closer to the mean than those of noncurrent assets. Corporate governance as indicated by board size had a mean of 8.417 with the standard deviation of 2.318. Furthermore, the maximum numbers of directors in the board were 13 while the minimum number was 4.

Table 1: Descriptive Statistics

*FP (Financial Performance); CA (Current Assets); NCA (Noncurrent Assets); CG (Corporate Governance); CS (Capital Structure); FA (Firm Age); FS (Firm Size) Source: Research data (2018)

Table 2: Diagnostics Tests

*CA (Current assets); NCA (Noncurrent Assets); CS (Capital Structure); CG (Corporate Governance); FA (Firm Age); FS (Firm Size)

Source; Research data (2018)

Table 3: Panel Unit Root Test

Source; Research data (2018)

The maximum value of capital structure was 30.842 implying that some listed firms had huge debts. The possible explanation is that firms under construction and manufacturing sector require huge capital which can be raised inform of debt to finance their capital-intensive projects. The mean size of listed firms was found to be 22.888 with a standard deviation of 1.285. Lastly, firm age had most numbers closer to the mean of 3.337 given a lower standard deviation of 0.707 compared to that of firm size (1.285).

Panel data in nature is stochastic or probabilistic given that there is no accurate formula when prediction needs to be done. The study thus utilized Levin, Lin and Chu (LLC), Im, Pesaran and Shin (IPS) to test for unit root. Ideally, the null hypothesis for both LLC and IPS test is that panels are not stationary against the alternative hypothesis (panels are stationary). From the findings in Table 3, all the probability values (p-values) for LLC and IPS tests were less than 5% level of significance. This led to rejection of the null hypothesis thereby implying that panels were stationary.

Hypothesis Testing

The study sought to test hypotheses using regression analysis given the direct relationship between asset structure and financial performance of listed construction and manufacturing firms at NSE. In addition, hypotheses stated given the moderating effect of corporate governance and capital structure was also tested.

Results on the Direct Effects 

Prior to presentation of direct effects findings, there was need to select the appropriate panel regression model. Basically, the null hypothesis states that random effect model is appropriate against the alternative hypothesis which states that fixed effect model is appropriate. As a result, Hausman test was conducted where by Probability of the Chi Square (Chi²) was found to be .0090<.05. Basing on this, the null hypothesis was rejected thereby implying that fixed effect model was appropriate in this study. In Table 4, R-Squared of 0.482 implied that 48.2% variations in financial performance (dependent variable) of listed construction and manufacturing firms at NSE in Kenya were explained by independent variables.

In Table 4, there was a positive (β = 1.389) and statistically significant (p-value = 0.025<0.05) relationship between noncurrent assets and financial performance. Hence, 1 unit increase in noncurrent assets led to increase in financial performance by 1.389 units. The study thus rejected H_o1a and concluded that there was a statistically significant relationship between noncurrent assets and financial performance of listed construction and manufacturing firms in Kenya. This finding thus was in line with those by Iqbal et al. [59,77]. However, the result contradicts Okwo et al. [82], Kotšina and Hazak [67] who documented no and negative relationship respectively between noncurrent assets and financial performance. In addition, there was a positive (β = 1.452) and statistically significant (p-value = 0.000<0.05) relationship between current assets and financial performance. As a consequence, 1 unit change in current assets led to increase in financial performance by 1.452 units. Based on this result, hypothesis H_o1b was rejected; there is no significant relationship between current assets and financial performance of listed construction and manufacturing firms at NSE in Kenya. The study thus in tandem with Ishmael and Kehinde [60] as well as Yahaya et al. [123] concluded that there exist a positive and statistically significant relationship between current assets and financial performance of listed construction and manufacturing firms in Kenya. From the results in Table 4, model 1 was fitted as follows.

Model 1:

Results for Moderation Effect 

As to assess the moderating effect, an interaction was created between capital structure and noncurrent assets. In Table 5, a positive (β = 0.366) and statistically significant (p-value = 0.024<0.05) relationship between noncurrent assets and financial performance was maintained even though it was lower than in direct effects results (β = 1.389). Moreover, there was a positive (β = 0.734) but insignificant (p-value = 0.267>0.05) relationship between capital structure and financial performance.

Checking on the interaction result, there was a negative (β = -0.057) and insignificant (p-value = 0.141>0.05) moderating effect of capital structure in the relationship between noncurrent assets and financial performance. The study sought to test hypothesis H_o2a; there is no significant moderation effect of capital structure on the relationship between noncurrent assets and financial performance of construction and manufacturing listed firms in Kenya. From the results, H_o2a was failed to be rejected thereby concluding that capital structure does not moderate the relationship between noncurrent assets and financial performance of construction and manufacturing firms listed in Kenya. From the mod graph presentation in Figure 2, it is evident from the two parallel lines that there is no moderating effect of capital structure. Thus, at low levels of noncurrent assets, there is high financial performance for listed firms with high capital structure compared to those with low capital structure. At high levels of noncurrent assets, financial performance of firms with low and high capital structures slightly increase but the former still remains below those firms with high capital structure. 

Figure 2: Nature of Moderating effect of Capital Structure in the Relationship between Noncurrent Assets and Financial Performance

Source: Research Data (2018)

Table 4: Regression Results for Direct Effects

*Standard errors are shown in parenthesis

Source; Research data (2018)

Table 5: Moderating Effect of Capital Structure in the Relationship between Noncurrent assets and Financial Performance

*Standard errors are shown in parenthesis

Source; Research data (2018)

This therefore implies that interaction effect of capital structure does not have impact on the effect of noncurrent assets on financial performance of listed construction and manufacturing firms at NSE in Kenya.

Based on the results in Table 5, model 2 was fitted as follows:

Table 6: Moderating Effect of Capital Structure in the Relationship between Current assets and Financial Performance

*Standard errors are shown in parenthesis

Source; Research data (2018)

The study further tested H_o2b; there is no significant moderation effect of capital structure on the relationship between current assets and financial performance of construction and manufacturing listed firms in Kenya. Prior to checking for interaction effect, the study found in Table 6 that current assets positively (β = 2.266) and statistically significantly (p-value = 0.034<0.05) related with financial performance. The estimate in this case was higher compared to 1.452 found during the estimation of direct effects. On the other hand, there was a positive (β = 0.832) and statistically significant relationship (p-value = 0.000<0.05) with financial performance. This finding thus concurred with those of Abor [2] and Tarek Al-Kayed et al. [109].

In Table 6, capital structure positively (β = 1.177) and statistically significantly (p-value = 0.000<0.05) moderated the relationship between current assets and financial performance. Thus, 1 unit increase in the interaction between capital structure and current assets led to the increase in financial performance by 1.177 units. In the end, hypothesis H_o2b was rejected and concluded that capital structure does significantly moderate the relationship between current assets and financial performance of construction and manufacturing firms listed at NSE in Kenya. 
 

Figure 3: Nature of Moderating effect of Capital Structure in the Relationship between Current Assets and Financial Performance

Source: Research Data (2018)

Figure 4: Nature of Moderating effect of Corporate Governance in the Relationship between Noncurrent Assets and Financial Performance

Source: Research Data (2018)

Figure 5: Nature of Moderating effect of Corporate Governance in the Relationship between Current Assets and Financial Performance

Source: Research Data (2018)

More importantly, capital structure had an enhancing moderating effect since it increases the effect of current assets on financial performance.

At low levels of current assets in Figure 3, financial performance of listed firms with low capital structure is higher compared to those with higher capital structure. At high levels of current assets, financial performance of listed firms with high capital structure increased rapidly than for firms with lower capital structure. Practically, listed firms with high capital structure are said to have more levels of debt compared to equity capital proportion. Hence, firms with high current assets and high capital structure have higher ROE which is an indicator of financial performance. This further implies that management is utilizing capital raised in form of equity well and that the net income for such firms is positive. Model 3 was therefore fitted as follows:

From Table 7, the study found a positive (β = 0.975) and statistically significant (p-value = 0.014<0.05) relationship between noncurrent assets and financial performance. Furthermore, there was a positive (β = 1.180) and statistically significant (p-value = 0.021<0.05) relationship between corporate governance and financial performance. This finding supports those by Van den Berghe and Levrau [115], Dalton and Dalton [29] as well as Jackling and Johl [61]. Once noncurrent assets were interacted with corporate governance, there was a positive (β = 1.700) and statistically significant (p-value = 0.032<0.05) effect on financial performance. Thus, there was rejection of hypothesis H_o3a; there is no significant moderation effect of corporate governance on the relationship between noncurrent assets and financial performance of construction and manufacturing listed firms in Kenya. It was instead concluded that corporate governance do moderate the relationship between noncurrent assets and financial performance of firms listed under construction and manufacturing sectors in Kenya. Notably, capital structure had enhancing moderating effect since its increase increased the effect of noncurrent asset on financial performance.

At low levels of noncurrent assets in Figure 4, financial performance of firms with low corporate governance is higher than for those with high corporate governance. Generally, noncurrent assets are not liquid hence cannot easily be converted into cash. This will force a firm to maintain low levels of noncurrent assets as to enhance liquidity position and thereby financial performance. As the number of members in board increases, decision making regarding performance could be lengthened thus not favorable to a firm. To overcome this, listed firms will decrease its board size as to advance financial performance. At high levels of noncurrent assets in Figure 4, financial performance of firms with high corporate governance is higher than for those firms with lower corporate governance. Practical implication is that as the number of noncurrent assets increases, listed firms tend to perform better. This is arises given that high number of board members have diverse opinions which may be favorable to elevating financial performance in the long run. Moreover, in line with the opinion by Donaldson and Fafaliou [36], increased corporate governance boosts investor confidence which in turn improves liquidity in the firm. Model 4 was fitted as follows:

In Table 8, current assets positively (β = 1.243) and statistically significantly (p-value = 0.001<0.05) affected financial performance. Thus, 1 unit increase in current assets led to change in financial performance by1.243 units. In regards to corporate governance, a positive (β = 1.207) and statistically significant (p-value = 0.000<0.05) was found given financial performance of listed construction and manufacturing firms at NSE in Kenya. This was in line with Jensen and Meckling [63] who set forth boards of directors are tasked with enforcing corporate governance controls. This will go a long way in hindering managers from pursuing their selfish interests and in turn improve financial performance. The study further found a positive (β = 2.204) and statistically significant (p-value = 0.000<0.05) moderating effect of capital structure. As a result, hypothesis H_o3b was rejected and concluded that capital structure does moderate the relationship between current assets and financial performance of listed construction and manufacturing firms at NSE in Kenya.

At low levels of current assets in Figure 5, financial performance of listed firms with low corporate governance is higher compared to those with high. Hence, despite that a firm has few current assets, high financial performance is still possible so long as the number of directors in the board remains low. Practically, these few directors in the board will make decisions which not only increase current assets from the low levels but also increase financial performance. At high levels of current assets, financial performance of firms with high corporate governance increases while those of firms with low corporate governance declines. Hence, corporate governance had an enhancing effect since by increasing it, effect of current assets on financial performance was evident in Figure 5. In support of the opinion by Donaldson and Fafaliou [36], liquidity arising from increased number of current assets thrives as a result of the board. Thus, the high number of directors in the board alongside current assets the higher the financial performance. Using the results in Table 8, model 5 was fitted as follows:

Table 7: Moderating Effect of Corporate Governance in the Relationship between Noncurrent assets and Financial Performance

*Standard errors are shown in parenthesis

Source: Research data (2018)

Table 8: Moderating Effect of Corporate Governance in the Relationship between Current assets and Financial Performance

*Standard errors are shown in parenthesis

Source: Research data (2018)

Generally, asset structure of firms comprises of current and noncurrent assets. This structure as pointed out by Reyhani [91] determines the survival of the firm. Moreover, a firm is in a better position to boosts its value as well as reduces risks using its asset Xu and Xu [122]. In most listed firms, with no exception of those in Kenya, the BOD as one of the vital elements of corporate governance are tasked with making decisions regarding financial performance. Hence, this board participates actively on making key decisions as financing and investing. The former relates to those decisions to raise capital through debt and equity while the latter allocates resources to key areas as to generate future economic benefits. Investing and financing decisions thus yield key concepts as asset structure and capital structure respectively. On the other hand, corporate governance comes into play given the monitoring role of the board in line with financial performance of the firm. In view of this therefore, the study successfully filled the gap in existing literature by examining asset structure, capital structure, corporate governance and financial performance collectively among listed construction and manufacturing firms at NSE in Kenya. From the analysis, both current and noncurrent assets positively affected financial performance of the listed firms. Given the interaction effect, capital structure failed to moderate the relationship between noncurrent assets and financial performance. In conclusion therefore, high and low levels of capital structure had no impact on the effect of noncurrent assets on financial performance. On the contrary, capital structure was an enhancing moderator since it positively and significantly moderated the relationship between current assets and financial performance. Thus, as the levels of capital structure were increased, effect of current assets on financial performance also increased. Lastly, corporate governance was concluded to be an enhancing moderator given the relationships between noncurrent as well as current assets and financial performance.

Theoretical, Practical Implications and Recommendations for Further Research

As per stewardship theory, the BOD is steward with the whole task of protecting shareholders and resources of the firm in general. The study extends this theory which focuses on the stewardship aspect by examining the extent to which board given its size interferes with the relationship asset structure and financial performance of the firm. Given the agency conflicts between shareholders and principals, agency theory proposes the use of board which comprise of independent directors to enhance monitoring and control in the firm. The study contributes to agency theory by bring in the aspect of the board in times of their size and not composition as to not only examine their key role but the extent to which they interfere with firm’s asset structure and financial performance nexus. Other than theoretical implications, the study brings in new knowledge which consists of the moderating effect of capital structure in current assets-financial performance linkage as well as the moderating effect of corporate governance in the relationship between assets structure concepts (both current and noncurrent assets) and financial performance. Moreover, the practical implications arose given the findings of the study. First and foremost, listed construction and manufacturing firms were suggested to increase the amount of investment in their current and noncurrent assets due to their positive impact on financial performance. As to increase financial performance, listed firms with low levels of current assets were suggested to maintain low levels of capital structure as well as corporate governance defined in terms of board size. On the other hand, those listed firms with high levels of current assets were suggested to improve their financial performance by maintaining high levels of both capital structure and corporate governance. Lastly, financial performance of listed firms with low levels of noncurrent assets could be derived by having low levels of capital structure as well as corporate governance. On the contrary, high capital structure and corporate governance are catalysts for better financial performance in listed firms with high levels of noncurrent assets. The study had its own limitations thereby creating a golden opportunity for future research researchers. First and foremost, the scope of the study could be extended from listed firms in construction and manufacturing sectors. This will help in incorporating listed firms in other sectors as well as unlisted firms. In terms of measurement of variables, the study suggested the use of other indicators of capital structure as well as market-based approaches as Tobin’s q in measuring financial performance. In the same breadth, other corporate governance mechanisms other than board size could be examined in future research. As to extend the study model, corporate governance could be examined as a mediating variable between asset structure and financial performance. In the same model, capital structure could be maintained as moderator in the relationship between asset structure and financial performance.

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