Abstract:
Purpose: The study aimed at examining the moderating effect of capital structure
in the indirect relationship between institutional ownership and financial
performance through corporate diversification of listed firms at the Nairobi
securities in Kenya.
Approach/Methodology/Design: Post positivist research paradigm and
explanatory research design guided the study in which 35 listed firms from 2003
to 2017 were included.
Findings: There was a significant interaction effect between capital structure and
institutional ownership on financial performance through corporate
diversification. The study extended market power theory by examining institutional
ownership structure given that corporate diversification is not only a source of
power to drive a firm’s performance.
Practical Implications: Institutional investors provide equity capital that is
collaborated with the firm’s capital structure. As a result, there exist sufficient
resources to take on diversification strategy despite this translating to a smaller
amount in terms of financial performance. The study had implications on Market
timing theory which opines that market timing is a ‘first order determinant’ to aid
in selecting a suitable form of financing given debt and equity. Ideally, the
preferences of different owners in the firm would affect the choice between debt
and equity financing.
Originality/value: Investigation of the interaction effect between capital structure
and institutional ownership on financial performance through corporate
diversification.
