The Moderating Role of Firm Characteristics on the Relationship Between Equity Financing and Financial Performance of Micro, Small and Medium Enterprises in Nakuru County

Abstract

Micro, Small and Medium Enterprises (MSMEs) are important drivers of economic development in many countries and thus is a medium of job creation and poverty alleviation. Although equity financing is increasingly recognized as a sustainable financing option for MSMEs, many enterprises in Kenya continue to experience poor financial performance, with high closure rates reported in urban centers such as Nakuru. Existing studies have explored the direct relationship between financing strategies and performance but have paid little attention to the moderating role of firm characteristics. This study therefore investigates the moderating role of firm characteristics on the relationship between equity financing and financial performance of MSMEs in Nakuru County. The study was informed by the financing life cycle of the firm theory. The study adopted an exploratory research design and targeted 7,384 MSMEs operating in Nakuru County. From this population, a sample of 379 enterprises was drawn using stratified and simple random sampling techniques. Data was gathered using a 5-point Likert scale questionnaire. A pilot study involving 37 MSMEs in Eldoret town was conducted to assess the validity and reliability of the research instrument. Validity was examined through factor analysis, while reliability was tested using Cronbach’s Alpha, with coefficients of 0.7 and above considered acceptable. Data was analysed descriptively and inferentially using SPSS Version 23 and presentation employed bar graphs, tables, explanation and pie charts. Findings revealed that equity financing had a positive and significant effect on MSME financial performance (β = 0.147, p = 0.008). Firm characteristics also had a significant influence on financial performance (β = 0.182, p = 0.000). Moreover, the interaction between equity financing and firm characteristics demonstrated a positive moderating effect on financial performance (β = 0.251, p = 0.000). This implies that firm attributes such as production capacity, managerial competence, and operational factors strengthen the contribution of equity financing to MSME growth and sustainability. The study recommends strengthening MSMEs’ internal financial capacity, promoting equity-friendly financing models, and encouraging profit reinvestment alongside modern management and technology adoption to boost performance and sustainability.