The Effects of Firm Size and Information Availability on the Capital Structure of Small and Medium Enterprises (SMEs) in Kiambu County, Kenya

1. Introduction

Small and Medium Enterprises (SMEs) are universally recognized as critical engines for economic growth, technological innovation, and job creation, particularly in developing economies (Beck & Demirgüç-Kunt, 2006). In Kenya, SMEs are pivotal to the achievement of the national development blueprint, Vision 2030. Despite their significance, these enterprises face a perilous existence; past statistics indicate that three out of five fail within the first few months of operation, and 80% of those that survive fail before their fifth year (Government of Kenya [GOK], 1999). A primary constraint contributing to this high mortality rate is unsustainable capital structure—the mix of debt and equity used to finance operations.

In developing economies like Kenya, over 90% of new ventures are financed by informal sources, with more than 60% of start-up capital coming from the business founders themselves. Even when formal credit is available, SMEs often lack viable choices due to stringent lending conditions, such as demands for immovable collateral, forcing them to rely on high-cost, short-term finance (Berger & Udell, 1998). While numerous studies have focused broadly on SME access to finance (e.g., Mokua, 2011; Ndungu, 2014), there is a scarcity of empirical evidence on how specific firm-level factors, namely firm size and information availability, directly influence the capital structure choices of Kenyan SMEs. This study sought to fill this gap by investigating the effects of firm size and information availability on the capital structure of SMEs in Kiambu County, Kenya.

2. Literature Review

The capital structure decisions of firms have been a central topic in corporate finance since Modigliani and Miller (1958). For SMEs, however, classical theories like the Trade-Off Theory and Pecking Order Theory take on different dimensions due to market imperfections. The Pecking Order Theory (Myers & Majluf, 1984) suggests that firms prioritize financing sources, preferring internal funds first, then debt, and equity as a last resort. This is highly relevant to SMEs, which, as this study confirms, heavily rely on personal savings, consistent with findings by Mokua (2011).

Firm size is a critical determinant of capital structure. Larger firms typically have easier access to external debt due to lower perceived risk, greater assets for collateral, and more stable cash flows (Berger & Udell, 1998). Indicators such as the number of employees, annual turnover, total assets, and business age are common proxies for size. A study in Cameroon by Ngehnevu and Nembo (2010) affirmed that firm size significantly impacts the ability of SMEs to secure external financing.

Information availability addresses the problem of information asymmetry, which is acute for SMEs. Lenders perceive SMEs as opaque due to a lack of audited financial statements and a track record, leading to higher borrowing costs or credit rationing (Stiglitz & Weiss, 1981). The availability of reliable information about different financing options and the SME's own financial health is therefore a key factor in its ability to navigate the credit market and make optimal capital structure decisions.

3. Methodology

This study employed an explanatory research design to establish cause-and-effect relationships. The target population was 889 SMEs registered in the Kiambu Business Directory (2015), stratified across manufacturing, agriculture, essential services, general merchandise, and commercial services. A sample size of 268 was determined using Fisher's formula and distributed proportionately across the sectors.

Data were collected using structured questionnaires administered directly to SME owners or managers, resulting in a 100% response rate. The instrument's reliability was confirmed with a Cronbach's alpha of 0.799 for the firm size construct and 0.740 for information availability. Data analysis was conducted using SPSS. The following multiple regression model was used to test the hypotheses:

Y = β₀ + β₁X₁ + β₂X₂ + β₃X₃ + β₄X₄ + β₅X₅ + ε

Where: Y = Choice of capital structure, X₁ = Purpose of finance, X₂ = Availability of information, X₃ = Size of business, X₄ = Collateral security, X₅ = Cost of finance, β₀ = Constant, ε = Standard error

4. Findings and Discussion

4.1. Demographic and Firm Characteristics

The majority of respondents (48.9%) were aged 20-30 years, and 68.3% were male. In terms of education, 41.8% had secondary education, and 36.6% held a diploma. Most businesses (45.1%) had been operational for 2-5 years, reflecting the typical SME lifecycle. The data revealed that ownership was primarily private (51.9%), followed by group-owned (33.2%).

4.2. Capital Structure Utilization

The findings strongly support the Pecking Order Theory. Personal savings were the most utilized source of finance, used to a great or greatest extent by 80.2% of respondents (M=4.19, SD=0.85). This was followed by borrowing from Microfinance Institutions (MFIs) (M=3.54) and family/relatives (M=3.20). In stark contrast, bank loans were the least utilized, with 41.8% of respondents not using them at all (M=2.39, SD=0.75). This aligns with Ndungu (2014), who attributed this reluctance to stringent bank requirements.

4.3. The Influence of Firm Size

The study found that firm size significantly influences capital structure choice (Overall M=3.82, SD=1.14). Respondents agreed that the number of employees (M=3.66), business age (M=3.87), annual turnover (M=3.50), and expansion plans (M=3.47) were significant factors. Larger, older, and growing firms demonstrated a greater capacity and need to access diverse financing sources, confirming the findings of Berger and Udell (1998).

4.4. The Influence of Information Availability

Information availability was found to be a powerful determinant of capital structure (Overall M=4.22, SD=0.87). Awareness of various sources of finance (M=4.25) and knowledge of different options (M=4.08) were the most influential factors. However, understanding application methodologies was a significant barrier (M=2.46). The primary source of information was friends and colleagues (64.6%), while formal channels like radio and newspapers were less utilized.

4.5. Hypothesis Testing

The null hypotheses stating that firm size and information availability have no significant effect on capital structure were rejected. The t-statistics for both variables were significant (p < 0.05), confirming that both factors are critical determinants of capital structure choice among SMEs in Kiambu County.

5. Conclusion and Recommendations

This study conclusively demonstrates that both firm size and information availability are significant determinants of capital structure for SMEs in Kiambu County, Kenya. The heavy reliance on internal finance and the underutilization of formal bank credit highlight a critical market gap and a point of vulnerability for SMEs.

Based on these findings, the following recommendations are proposed:

1. For Financial Institutions: Develop and market tiered financial products that are tailored to the specific size and growth stage of SMEs. For smaller, younger SMEs, this could include asset-light financing based on cash flow rather than traditional collateral.
2. For Policymakers: Launch targeted financial literacy programs that demystify formal financing and educate SME owners on the requirements and application processes for different credit products. These programs should leverage trusted information channels, such as business associations and peer networks.
3. For SME Owners: Proactively seek information on diverse financing options beyond personal savings and informal loans. Maintaining simple but accurate financial records can also help reduce information asymmetry and improve access to formal credit.

By addressing the dual constraints of firm scale and information gaps, stakeholders can help build a more robust and sustainable SME sector, ultimately contributing to Kenya's broader economic development goals.