Relationship Between Ownership Structure And Financial Performance Of Companies Listed At The Nairobi Securities Exchange In Kenya

Abstract

Distinct groups of stockholders have growing influence on performance of companies listed on East Africa’s stock markets. Recent policies on foreign ownership and the Growth of institutional investment at the NSE have made it critical to dig into the effects that these distinct stockholder groups have on profitability if any on listed companies. This paper seeks to establish the relationship between ownership structure and financial performance of listed firms at Nairobi Securities Exchange. The four dominant ownership groups focus on are local (EA Investors & institutional), foreign and managerial investors to determine their effect on the financial performance of companies listed at the Nairobi Securities Exchange in Kenya. The studyadopted descriptive research design and the target population was all the 65 listed companies in the Nairobi securities exchange in Kenya. A sampling was used to focus on actively traded counters to ensure reliability, completeness and integrity of secondary data collected from Nairobi Securities Exchange for a period of six years (2012-2017). STATA software was used to conduct regression and correlation analysis using panel data. The analysis was to test effect of each stockholder group on ROA. The Pearson correlation analysis test for multicollinearity was applied to the dependent variable (ROA) against the independent variables to find the correlation. The researcher also used the Levin-Lin Chu (LLC) test for Unit Roots to test for stationarity between the dependent and independent variables. The White test was applied to check for Heteroscedacity and finally the Woodridge test was done for serial correlation. The study findings showed that the correlation analysis between ROA and firm performance indicated that government ownership is negatively related with the firm’s return on assets with significance of (p-value=0,06) whereas domestic ownership of firms is negatively correlated with firm’s return on assets (p-value=0.33) . Foreign ownership was established to be positively correlated with firm’s return on asset (pvalue=0.00) and management ownership is positively correlated with ROA (p-value=0.88). Regression analysis shows that relationship between government ownership and financial performance of companies is negative. Relationship between local ownership, foreign ownership and managerial shareholding is positive. Conclusion based on these findings are that higher government’s ownership deteriorates financial performance. Local ownership has a positive relationship with financial performance and therefore the higher the local investors’ ownership improves performance. Thirdly, foreign ownership has a positive effect on a firm’s financial performance i.e. firms with higher foreign ownership have higher ROA in line with prior expectations that improved firm performance is measured with more foreign stake. Lastly, Local ownership concentration, as measured by the shareholding by local investors on listed firms, has a positive relationship with financial performance. This study recommends that directors of companies should target more local and foreign stockholding and reduced Government and management shareholding to achieve optimal performance. The study had limitation due to scanty and inconsistent data, particularly with suspended and illiquid companies. More studies into the negative effect of Government ownership is needed. Further studies on how government ownership influences the strategic direction and operational management of listed companies would also help to identify the problem.