Modeling Financial Performance of Manufacturing Firms on Capital Structure. Does The Panel Data Model Used Matter? Evidence From the Nairobi Securities Exchange
DOI:
https://doi.org/10.53819/81018102t5326Abstract
Manufacturing firms contribute a significant proportion to Kenya’s Gross Domestic Product (GDP), putting them at the center of its development. To optimize production, most manufacturing stakeholders have taken cognizance of the capability of econometric panel data models to maximize output on minimal input. Yet, a gap exists on whether the panel data used in modeling financial performance on capital structure matters. Therefore, this research used the financial performance-capital structure nexus in listed manufacturing firms trading at the Nairobi Securities Exchange (NSE) to establish whether the panel data model in use mattered. Using 85 observations drawn from 14 firms, and covering the period 2016 to 2022 inclusive, the study compared the pooled Ordinary Least Squares (OLS), the random effects (RE), and the fixed effects (FE) models. The study revealed that parameters such as model restrictiveness, estimation consistency and efficiency, and temporal variations dictate the model to be used, confirming that the panel data model indeed matters. Retrospectively, the pooled OLS model suits situations without unobservable entity-specific effects, the RE model suits situations where differences across firms do not correlate with the predictors, and the FE model is preferred when some time-invariant characteristics such as company culture are omitted. The significance of this finding to manufacturers is that robust decision making regarding leveraging financial performance of manufacturing firms on capital structure is a function of careful consideration of available panel data models as defined by existing parameters. Future studies can strengthen this finding by including dynamic panel data models.
Keywords: Manufacturing firms, panel data, financial performance, capital structure, model restrictiveness, temporal variations
References
Ajibola, A., Wisdom, O., & Qudus, O. L. (2018). Capital structure and financial performance of listed manufacturing firms in Nigeria. Journal of Research in International Business and Management, 5(1), 81-89.
Alam, H. M., Raza, A., & Akram, M. (2011). A financial performance comparison of public vs private banks: The case of commercial banking sector of Pakistan. International Journal of Business and Social Science, 2(11).
Alhialy, Z., & Alsaegh, N. (2021). Test Some Determinants of the Financial Performance of Iraqi Insurance Firms is An Econometrics Analytical Study. TANMIYAT AL-RAFIDAIN, 40(132), 208-224.
Altmeppen, K. D., Hollifield, C. A., & Van Loon, J. (Eds.). (2017). Value-oriented media management: Decision making between profit and responsibility. Springer.
Atidhira, A. T., & Yustina, A. I. (2017). The influence of return on asset, debt to equity ratio, earnings per share, and company size on share return in property and real estate companies. JAAF (Journal of Applied Accounting and Finance), 1(2), 128-146.
Audax, A. (2018). Factors affecting financial performance of manufacturing firms listed in Nairobi securities exchange Kenya (Doctoral dissertation, United States International University-Africa).
Barigozzi, M., Lippi, M., & Luciani, M. (2016). Non-stationary dynamic factor models for large datasets. Available at SSRN 2741739.
Berk, R., Buja, A., Brown, L., George, E., Kuchibhotla, A. K., Su, W., & Zhao, L. (2019). Assumption lean regression. The American Statistician.
Breuer, M., & deHaan, E. (2023). Using and interpreting fixed effects models. Available at SSRN.
Bun, M. J., & Harrison, T. D. (2019). OLS and IV estimation of regression models including endogenous interaction terms. Econometric Reviews, 38(7), 814-827.
Ceesay, E. K., & Moussa, Y. M. (2022). Pooled ordinary least-square, fixed effects and random effects modelling in a panel data regression analysis: a consideration of international commodity price and economic growth indicators in 35 Sub-Saharan African countries. International Journal of Technology Transfer and Commercialisation, 19(1), 23-44.
Chen, J. (2024, February 24). How Debt Financing Works, Examples, Costs, Pros & Cons. Available at https://www.investopedia.com/terms/d/debtfinancing.asp
Chindengwike, J. (2021). Effect of Equity on Financial Performance among Small Business Firms in East Africa Countries. IJIRMPS, 9(3):194-200.
Collischon, M., & Eberl, A. (2020). Let’s talk about fixed effects: Let’s talk about all the good things and the bad things. KZfSS Kölner Zeitschrift für Soziologie und Sozialpsychologie, 72(2), 289-299.
Collischon, M., & Eberl, A. (2020). Let’s talk about fixed effects: Let’s talk about all the good things and the bad things. KZfSS Kölner Zeitschrift für Soziologie und Sozialpsychologie, 72(2), 289-299.
Cornell, J. E., Mulrow, C. D., Localio, R., Stack, C. B., Meibohm, A. R., Guallar, E., & Goodman, S. N. (2014). Random-effects meta-analysis of inconsistent effects: a time for change. Annals of internal medicine, 160(4), 267-270.
Curtis, P. G., Hanias, M., Kourtis, E., & Kourtis, M. (2020). Data envelopment analysis (DEA) and financial ratios: A pro-stakeholders’ view of performance measurement for sustainable value creation of the wind energy.
Dao, B. T. T., & Ta, T. D. N. (2020). A meta-analysis: capital structure and firm performance. Journal of Economics and Development, 22(1), 111-129.
Detthamrong, U., Chancharat, N., & Vithessonthi, C. (2017). Corporate governance, capital structure and firm performance: Evidence from Thailand. Research in International Business and Finance, 42, 689-709.
Ganiyu, Y. O., Adelopo, I., Rodionova, Y., & Samuel, O. L. (2019). Capital structure and firm performance in Nigeria. African Journal of Economic Review, 7(1), 31-56.
Gitundu, E. W., Kiprop, S. K., Kibet, L. K., & Kisaka, S. E. (2016). Corporate governance and financial performance: A literature review of measurements and econometric methods of data analysis in research. Corporate Governance, 7(14), 116-25.
Greene, W., & Zhang, Q. (2019). Nonlinear and related panel data models. In Panel Data Econometrics (pp. 45-96). Academic Press.
Groover, M. P. (2020). Fundamentals of modern manufacturing: materials, processes, and systems. John Wiley & Sons.
Gul, R., Al-Faryan, M. A. S., & Ellahi, N. (2022). The nexus between intellectual capital and financial performance: an econometric analysis from Pakistan. The Journal of Asian Finance, Economics and Business, 9(7), 231-237.
Gul, S., & Cho, H.-R. (2019). Capital structure and default risk: Evidence from Korean stock market. The Journal of Asian Finance, Economics, and Business, 6(2), 15-24. https://doi.org/10.13106/jafeb.2019.vol6.no2.15.
Horváthová, J., & Mokrišová, M. (2017). Capital structure modelling and analysis of its impact on business performance. Financial Assets and investing, 8(2), 19-36.
Hsiao, C. (2022). Analysis of panel data (No. 64). Cambridge university press.
Jian, X., & Zhou, Y. (2020, November). An Empirical Study on the Influence of State-owned Equity Financing on the Performance of Family Enterprises Based on Fixed Effects Model and Threshold Model. In 2020 2nd International Conference on Economic Management and Model Engineering (ICEMME) (pp. 629-632). IEEE.
Kalli, M., & Griffin, J. E. (2014). Time-varying sparsity in dynamic regression models. Journal of Econometrics, 178(2), 779-793.
KAM (2024). Kenya Association of Manufacturers: Spotlight. https://www.mfg-outlook.com/manufacturing-spotlights/kenya-association-of-manufacturers-spotlight
Le, T. P. V., & Phan, T. B. N. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in international business and finance, 42, 710-726.
Lieder, M., & Rashid, A. (2016). Towards circular economy implementation: a comprehensive review in context of manufacturing industry. Journal of cleaner production, 115, 36-51.
Marimuthu, F., & Caroline Singh, S. (2021). Do South African state-owned entities follow the pecking order theory of capital structure?. Public and Municipal Finance; Vol. 10, Issue 1.
Miglo, A. (2016). Capital structure in the modern world. Springer.
Moundigbaye, M., Rea, W. S., & Reed, W. R. (2018). Which panel data estimator should I use?: A corrigendum and extension. Economics, 12(1), 20180004.
Musau, V. M., Waititu, A. G., & Wanjoya, A. K. (2015). Modeling panel data: Comparison of GLS estimation and robust covariance matrix estimation. American Journal of Theoretical and Applied Statistics, 4(3), 185-191.
Muturi, W., & Njeru, A. (2019). Effect of equity finance on financial performance of small and medium enterprises in Kenya. International Journal of Business and Social Science, 10(5), 60-75.
Mwasiaji, E. T. (2019). The effect of government policy on the performance of selected manufacturing enterprises In Kenya. International Journal of Economics, Business and Management Research, 3(12), 2456-7760.
Nabila (2021, October 6). Manufacturing Business: Definition & Characteristics. Available at https://www.clockster.com/what-is-a-manufacturing-business-definition-characteristics/
Nguyen, H. T., & Nguyen, A. H. (2020). The impact of capital structure on firm performance: Evidence from Vietnam. Journal of Asian Finance, Economics and Business, 7(4), 97-105.
Njagi, I. K., Maina, K. E., & Kariuki, S. N. (2017). Equity financing and financial performance of small and medium enterprises in Embu Town, Kenya.
Njoroge, I. (2015). Effect of liquidity on the financial performance of construction and allied and companies listed at the NSE. Unpublished MBA project, University of Nairobi.
Odipo, M. K. & Obbayi, G (2023). Effect of Capital Structure on Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange. Global Journal of Management and Business Research, 23 (2): 11-22.
Okeyo, H. B. (2022). The Role of The Manufacturing Sector in Economic Diversification, Jobs Creation and Indsutrialization of Kenya: Opportunities and Challenges in Fostering Export-led Industrialization. Nairbi: Ministry of Industrialization, Trade and Enterprise Development.
Omollo, B. A., Muturi, W. M., & Wanjare, J. (2018). Effect of debt financing options on financial performance of firms listed at the Nairobi Securities Exchange, Kenya. Research Journal of Finance and Accounting, 9(10), 150-164.
Onchong’a, E. A., Muturi, W., & Atambo, W. (2016). Effects of debt financing on businesses firms financial performance. International Journal of Social Science and Information Technology, 2(5), 723-737.
Otekunrin, A. O., Nwanji, T. I., Abiodun, A. S., Awonusi, F., & Eluyela, F. D. (2018). Relationship between debt ratio and financial performance of Nigerian quoted companies. Journal of Social Sciences and Public Policy, 10(1), 54-70.
Plümper, T., & Troeger, V. E. (2019). Not so harmless after all: The fixed-effects model. Political Analysis, 27(1), 21-45.
Rachman, S., Karyatun, S., & Digdowiseiso, K. (2023). The Effect of Current Ratio, Debt to Equity Ratio, Debt to Asset Ratio, and Total Asset Turnover on The Financial Performance of Property and Real Estate Companies Listed in The Idx For The 20162020 Period. Jurnal Syntax Admiration, 4(2), 361-377.
Rashidghalam, M., Heshmati, A., Dashti, G., & Pishbahar, E. (2016). A comparison of panel data models in estimating technical efficiency.
Rita, M. R., Hidayat, R., & Kristanto, A. B. (2022). Competitive Advantage and Firm Performance: Debt Financing as a Moderating Variable. JDM (Jurnal Dinamika Manajemen), 13(1), 1-18.
Soytas, M. A., Denizel, M., & Usar, D. D. (2019). Addressing endogeneity in the causal relationship between sustainability and financial performance. International Journal of Production Economics, 210, 56-71.
Tanko, U. M., Siyanbola, A. A., Bako, P. M., & Dotun, O. V. (2021). Capital structure and firm financial performance: Moderating effect of board financial literacy in Nigerian listed non-financial companies. Journal of Accounting Research, Organization and Economics, 4(1), 48-66.
Tarigan, J., Listijabudhi, S., Hatane, S. E., & Widjaja, D. C. (2019). The impacts of intellectual capital on financial performance: An evidence from Indonesian manufacturing industry. Indonesian Journal of Business and Entrepreneurship (IJBE), 5(1), 65-65.
Tretiakova, V. V., Shalneva, M. S., & Lvov, A. S. (2021). The relationship between capital structure and financial performance of the company. In SHS Web of Conferences (Vol. 91, p. 01002). EDP Sciences.
Tuovila, A. (2024, January 31).Updated January 31, 2024Capital Structure Definition, Types, Importance, and Examples. Investopedia. Available at https://www.investopedia.com/terms/c/capitalstructure.asp
Vătavu, S. (2015). The impact of capital structure on financial performance in Romanian listed companies. Procedia economics and finance, 32, 1314-1322.
Williams, R. (2015). Panel data 4: Fixed effects vs random effects models. University of Notre Dame.
Wooldridge, J. M. (2019). Correlated random effects models with unbalanced panels. Journal of Econometrics, 211(1), 137-150.
Yator, J., & Gitagia, F. (2023). Effect of equity financing on the financial performance of manufacturing firms listed in Nairobi Securities Exchange. International Academic Journal of Economics and Finance, 3(9), 426-436.
