Effect of firm size on financial performance of sugar firms in western Kenya .

Abstract

Kenya Sugar sub-sector accounts for 7.5% of the National GDP and 15% of the Agricultural GDP. These firms have been experiencing poor financial performance with an average after tax profit of - 24% for the period 2010-2018. Some of these firms have faced frequent closures with a case of one being put under receivership, yet a section of some small firms seem to be thriving. The discrepancy in these sugar firm’s financial performance points out to the contribution of firm size as presumed by the theory of economies of scale. The purpose of this study was to analyse firm size and financial performance relationship in sugar firms in Western Kenya. The study was anchored on the theory of economies of scale and dividend signalling theory based on ROE &ROA. The study used correlation research design. The target population was 8 sugar firms found in Western Kenya that were in operation during the study period. The firms were pooled for10 years resulting to 80 data points. The result show that firm size is a significant positive predictor of financial performance with (R2 =.153, p=.000) (coeff. =.557) r= (.388**, p=.000) implying that 15.3% of the variance in financial performance of sugar firms in Western Kenya was explained by firm size. Firm size also had positive relationship with all the indicators of financial performance; ROA (r=.333**, p=.003) and ROE (r=.401**, p=000) implying that for every one unit increase in firm size, there was ensuing improvement in financial performance of these firms by .557. The study concludes that firm size had a statistically significant positive effect on financial performance. The study recommends that sugar firms should enhance their sizes if they are to benefit from the economies of large scale. The findings are deemed to be of use to academia as a basis for further research in finance.