FINANCING STRUCTURE ON FINANCIAL PERFORMANCE IN SELECTED BEACH HOTELS IN MOMBASA COUNTY, KENYA
Abstract
The purpose of the study was to investigate the financing structure and financial performance of selected beach hotels. The adopted proxies of financial structure are internal equity financing, debt financing, retained earnings and trade credit financing. The theories guiding the study are market timing theory, trade-off theory and pecking order theory. This study employed descriptive survey research design. The target population for this study was management staff of six beach hotels which were 4-star rated in Mombasa. Purposive sampling technique was used to select a sample size of 74 participants by help of Yamane statistical formula. Primary data was collected using structured questionnaire based on the objectives of the study. The collected data was edited, coded for processing using the Statistical Package for Social Sciences (SPSS v.26) and results were presented in frequency tables. Descriptive and inferential statistics were used to analyze information generated from the respondents. The study findings found that the hotels owner’s earnings are reinvested back to the hotel operations. It was also concluded that internal equity financing is the most preferred financing choice to maintain optimal liquidity. The study concluded that internal equity financing has a positive effect on hotel performance. Also the hotel uses internal equity financing due to its cost effectiveness and the hotel prefers internal equity financing so as to maintain hotel control. The study also concluded that the hotels finance deficits through debts so as to maintain ownership. Also the study concluded that hotel opts for debt financing because its tax deductible hence savings in tax and the hotel uses bank overdrafts as debt financing tool. The study concluded that the capability of the debt financing to improve the credit score is why its preferred by the hotels and it is only when the hotel is in need of renovation and expansion that is opts for debt financing. The study recommended that the hotels’ financial flexibility should be improved through trade credit. The hotel management should complement other financing sources with trade credit and address liquidity issues in the hotel by taking trade credit. The choice of trade credit by hotels is due to the fact that it is less expensive and the hotels should overcome asymmetry information on service quality and that trade credit is opted by hotel due to its less expensive feature. The study recommended that hotels overcome information asymmetry on product quality between suppliers and buyers.
Key Words: Internal Equity, Debt Financing, Retained Earnings, Trade Credit
CITATION: Mnyazi, E. S., & Wekesa, M. (2022). Financing structure on financial performance in selected beach hotels in Mombasa County, Kenya. The Strategic Journal of Business & Change Management, 9 (4), 962 – 975.
Full Text:
PDFReferences
Amara, & Aziz, B. (2017). Impact of capital structure on firm performance: Analysis of Food Sector Listed on Karachi Stock Exchange. International Journal of Multidisciplinary Consortium, 1(1), 1–11.
Baker & Wurgler, (2016), Market Timing and Capital Structure, The Journal of Finance, 2002. http://www.blackwellpublishing.com/content/BPL_Images/Journal_Sample JOFI0022-1082~57~1~414%5C414.pdf.
Balduzzi, P., Elton, E. J., & Green, T. C. (2015). Economic News and Bond Prices: Evidence from the U.S. Treasury Market. The Journal of Financial and Quantitative Analysis, 36(4), 523. https://doi.org/10.2307/2676223
Baral, K. J. (2016). Determinants of Capital Structure: A Case Study of Listed Companies of Nepal. The Journal of Nepalese Business Studies.
Bhat, H. S., & Zaelit, D. (2017). Forecasting retained earnings of privately held companies with PCA and L1 regression. Applied Stochastic Models in Business and Industry, 30(3), 271–293. https://doi.org/10.1002/asmb.1972
Boodhoo, R. (2016). Capital Structure and Performance of Mauritius Listed Firms: Theoretical and Empirical Evidences. Mauritius: University of Technology.
Bryman, A., & Bell, E. (2013). Business Research Methods (3rd Ed.). New York, Oxford University Press.
Chasan, E. (2017). Mid-Size Firms Tap Retained Earnings to Fund Growth. The Wall Street Journal.
Cooper, D. R., & Schindler, P. S. (2015). Business research methods, (12th, edition). McGraw-Hill Publishing, Co. Ltd. New Delhi-India.
Creamer, D., Dobrovolsky, S. P., Borenstein, I. & Borenstein, M. (2015). Capital in Manufacturing and Mining: Its formation and Financing. Princeton University Press.
Datta, S., Iskandar, M. & Raman, K. (2016). Managerial Stock Ownership and the Maturity Structure of Corporate Debt. Doi 101111/j.1540-6261.2005.00800.x
Ebrahimi, M., & Chadegani, A. A. (2017). The Relationship between Earning, Dividend, Stock Price and Stock Return: Evidence from Iranian Companies. International Conference on Humanities, Society and Culture, 20, 318–323.
Elgonemy, E. R. (2016). Debt-Financing Alternatives: Refinancing and Restructuring in the Lodging Industry. Cornell Hotel and Restaurant Administration Quarterly, Volume: 43 issue: 3, page(s): 7-21
Erasmus, P. D. (2015). The Relative and Incremental Information Content of the Value Based Financial Performance Measure Cash Value Added (CVA). Management Dynamics Journal, 17(1), 2-15.
Frielinghaus, A. B. (2015). Capital Structure and the firm's life stage. South African journal of Business Management , 36 (4), 9-18.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Influence Analysis of Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), Debt To Equity Ratio (DER), and current ratio (CR), Against Corporate Profit Growth In Automotive In Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), 2222–6990. https://doi.org/10.6007/IJARBSS/v4-i12/1331
Hovakimian, A., Hovakimian, G., & Tehranian, H. (2016), Determinants of target capital structure: The case of dual debt and equity issues, Journal of financial economics, 71(3), 517-540.
Huyghebaert, N. (2017), On the Determinants and Dynamics of Trade Credit Use: Empirical Evidence from Business Start-ups, Journal of Business Finance & Accounting, Vol 33,, pp 307ff
Karuma, M. N., Ndambiri, A. N., & Oluoch, J. O. (2018). Effect of debt financing on financial performance of manufacturing firms in Nairobi securities exchange .The Strategic Journal of Business & Change Management , 5(2), 1674 – 169.
Kothari, C. R. (2014). Research methodology: Methods and Techniques. New Age International.
Leland, H. & D, Pyle (2016). Informational asymmetries, financial structures and financial intermediation. Journal of Finance, 32(2), 371- 387.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital. American Economic Review, 53(3), 433-443.
Moorhouse, A. (2016). An introduction to financial soundness indicators. Bank of England (www. bankofengland. co. uk/statistics/ms/articles/art1feb04. pdf).
Mugenda, M. O. & Mugenda, A. (2012), Research Methods: Qualitative and Quantitative Approaches, African Centre for Technology Studies, Nairobi, Kenya.
Muhoro, M. E. (2016). The relationship between capital stucture and proitability of construction an allied companies listed at the Nairobi Securities Exchange. Unpublished management research project of the University of Nairobi.
Newell, G. (2016). Factors influencing hotel investment decision making, Journal of Property Investment & Finance, Vol. 24 No. 4, pp. 279-294. https://doi.org/10.1108/14635780610674499
Njeru, A.W. (2018). Determinants of Choice of Source of Entrepreneurial Finance for Small and Medium Sized Enterprises Survey of Thika District, Kenya. PhD (Entrepreneurship) Theses, Jomo Kenyatta University of Agriculture and Technology, Kenya.
Nyanamba, O. S. (2018). Influence of capital structure on financial performance of Craft Micro Enterprises in Kenya. A published Doctoral Thesis, Jomo Kenyatta University of Agriculture and Technology, Kenya.
Nzau, M. M., Kungu, N. J., & Onyuma, O. S. (2019), Effect of bond issuance on financial performance of firms listed in Nairobi Securities Exchange. International Journal of Business and Management Review, Vol.7, No.8, pp.16-25, ECRTD-UK.
Oguna, A. A. (2016). Effects of capital structure on financial performance of firms listed under manufacturing, construction and allied sector at NSE. Unpublished MBA Thesis. University of Nairobi, Kenya.
Onyuma, S. O. (2017), Analysis of financial deepening determinants influencing securities market development in Kenya. Unpublished PhD Thesis (Laikipia University, Kenya).
Pandey, I. M. (2015). Financial Management. Eleventh Edition, Vikas Publishing House PVT Ltd, India.
Rajan, R.G. & Zingales, L. (2014). What Do We Know about Capital Structure? Some Evidence from International Data, Journal of Finance, 50(5), 1421-1460.
Ross, S. A. (2016). Corporate Finance. New York: Graw-Hill Companies Inc. 6th Edition.
Ross, S. A., Westerfield, R. W., Jaffe, J., Kakani, R. K. (2016). Corporate Finance. Tata McGraw-Hill Edition 2009, 8th Edition.
Thuranira, M. (2016). The Effect of Retained Earnings on the Returns of Firms listed at the Nairobi Securities Exchange. University of Nairobi, Kenya.
Tongkong, S. (2017). Key factors influencing capital structure decision and its speed of adjustment of Thai listed real estate companies. Procedia - Social and Behavioral Sciences, 40, 716–720. https://doi.org/10.1016/j.sbspro.2012.03.254
Tonui, C. F. (2018). Effect of capital structure on value of firms listed on the NSE, Kenya. Unpublished Thesis, University of Nairobi, Kenya.
Umar, M. (2016). Impact of capital structure on firms’ financial performance: Evidence from Pakistan. Journal of Basic and Applied Science Research, 9(3)1-13.
Williamson, O. (2016). Corporate Finance and Corporate Governance. Journal of Finance, 43, 567 – 592.
DOI: http://dx.doi.org/10.61426/sjbcm.v9i4.2463
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.