Abstract:
The study sought to investigate the effect of equity financing on the performance of SMEs in
Bungoma County Kenya. Under the empirical literature review, the study discussed current and
relevant studies to the topic. Under the theoretical literature review, pecking order theory was
discussed. Descriptive and inferential research designs were then used. The study area was
Bungoma County located in western Kenya with an approximate size of 2207KM2. The target
population was 4721 licensed SMEs retail shops operating in the county while simple random
sampling technique was used to select a sample of 368 SME retail shops. Data was collected
using structured Likert scale questionnaires to obtain opinions from SMEs managers and
owners. A pilot study was then conducted to test the reliability and validity of the data collection
instruments. Descriptive and Inferential data analysis were then used. The descriptive statistics
revealed that majority of the SMEs use equity financing in their capital structure. Similarly, it was revealed that SMEs had been witnessing an increase in performance measured by return on
equity, return on assets and return on capital employed. For inferential statistics, the correlation
results showed that equity financing had a positive association with performance. The
regression model was also statistically significant signifying that the variable equity financing
explains the changes in performance of SMEs. The study concluded that equity financing have
a statistically positive and significant effect on the performance of SMEs. The study
recommended the government through the Micro and Small Enterprises Authority to make
policies that will guide the SMEs on the way to increase the use of equity financing as well as
the management and owners of SMEs to seek for strategies to increase their use of equity
financing
