Effect of Current Liability Structure on Financial Performance of Manufacturing Firms in the Building and Construction Sector in Kenya

Abstract

Financial performance especially returns on capital invested in businesses is a great concern of all organizations including those that operate in the building and construction sector. Organizations gauge their financial performance to check how well their operating, financing and investing activities are being run to generate firm profits. It is however noteworthy that despite this concern for firm profitability, extant literature is still not clear on how current liability structure (the proportion of current liabilities out of the entire business financial obligations) affect the financial performance of businesses particularly those in the building and construction sector which forms a key economic segment in Kenya. Companies have a variety of current liability management policies that range from extremely low ratios of current liabilities on one hand to extremely high ratios. There is lack of theoretical and empirical consensus on how the variations in current liability management policies affect the financial performance of these targeted companies. Empirically, extant research arrives at conflicting findings as to how current liability structure is related to financial performance ranging from negative, zero to positive effect on profitability.  Theoretically, whereas the agency theory of Jensen and Meckling (1976) fails other to pinpoint a clear association between the current liability structure and financial performance. The trade-off theory of Gitman (1974) implies direct relationship between current liability structure and financial performance. This study is designed as a causal exploratory survey using the largest 44 companies in the building and construction sector in Kenya over a 5-year period covering 2016 to 2021. This forms 220 firm-year observations. Fixed effects bivariate panel regression model was adopted after conducting model specification tests. The test of hypothesis was conducted using the t-statistic at 95% confidence interval. Based on the positivist research philosophy, the findings reveal that current liability structure (CLS) as measured by the current liability to total liability ratio had a positive effect on financial performance as measured by return on equity. The study was limited to the large firms in the building and construction sector and recommends an enhanced sample for all company sizes to check out if size has an effect on the robustness of the findings.