Effect Of Firm Characteristics On The Profitability Of Listed Investment Companies In Kenya

Abstract

Financial statements are very useful for reporting and analysis of financial performance to determine the profitability of the company. Financial ratios which are derived from firm characteristics are used by the interested parties such as management, investors, government among other parties to make investment decisions. As such, the purpose of this research project was to assess the effect of firm characteristics on the profitability of investment companies in Kenya as listed at the NSE. The specific objectives of the study were to establish the effect of liquidity on the profitability of listed investment companies in Kenya, to determine the effect of asset management on the profitability of listed investment companies in Kenya and to investigate the effect of firm leverage on the profitability of listed investment companies in Kenya. The market timing theory, pecking order theory and trade-off theory helped in developing the study. Census survey method was used with a target population of 4 investment companies as currently listed under investments at NSE. Secondary data from financial statements and journals for a period of 8 (2010 – 2017) years were used and data collection forms were developed to help in gathering information efficiently. Regression models and STATA software were used for data analysis where diagnostic tests were done using Hausman test, multicollinearity, heteroscedasticity and normality test to determine appropriate model. Panel data analysis plan was also undertaken. The study findings indicated that there was a strong positive correlation between liquidity and profitability of listed investment companies in Kenya. On the effect of asset management and leverage on profitability of listed investment companies in Kenya, the study results indicated a negative correlation of -03466 and -1.133987 respectively. The study recommended that investment companies should redesign their ability to utilize fixed assets to generate sales efficiently. Further, the study recommended that the companies should check their leverage use in terms of asset funding as well as reconsider their approach in debt financing in order to develop a strong positive correlation between them. The study recommends that another study be carried on asset management and leverage to determine their effect on profitability of investment companies since the findings of this study found out a negative relationship. Other firm characteristics should also be incorporate in the future research so as to estimate their relationship with profitability of listed investment companies in Kenya.