Ownership Structure and Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

This study investigated the effect ownership structure has on financial performance of firms listed in the Nairobi Securities Exchange. The specific objective of the study was to determine the relationship between managerial shareholding and financial performance. The study was informed by the agency theory, the stakeholder’s theory and the Stulz integrated theory. The study used descriptive survey and cross sectional and longitudinal research design. The population comprised of all firms quoted at the NSE between 2011 and 2016. In this study, 52 firms qualified for inclusion in the study. Data was obtained from annual financial reports, company prospectuses, the Nairobi Securities Exchange handbook and the Capital Markets Authority database. Secondary data comprising of financial statements was coded using SPSS (Version 22). Descriptive statistics was used to provide summarized data through use of standard deviation, mean and features of SPSS (Version 22) was vital in variable response comparison and variable frequencies. Hausman test was used to determine the appropriateness of the multiple regression models. The study found out that ownership structure has a significant relationship with financial performance. Among individual variables, managerial ownership has a positive and significant effect (β1= 0.303, p = 0.012) on Return on Assets controlling for the age of the firm. Individual ownership also has a positive and significant effect (β2 = 0.319, p = 0.011) with Return on Assets controlling for the age of the firm. Furthermore, the size of the firm does not have a significant effect on the return on assets while the age of the firm has a positive and significant effect on the return on assets (β2 = 0.547, p = 0.000). As such, those in charge of governance in a firm should ascertain the impact of value addition of each form of ownership to the firm prior to arriving at the correct balance between the two forms of ownership to aid the firm in achieving stout performance. Policy makers should ensure that their firms not only grow in terms of age but also in terms of size. Secondly, the policy makers should ensure there is balance between the two types of ownership and ascertain the effectiveness of each form of ownership with respect to financial performance to improve firm productivity. Finally, while ownership structure is a great determinant of the financial success of any firm as it informs how the organization is legally set up, firms must decide on the ownership formula that will offer the greatest benefits as the form chosen affects profits, risk or value of the firm as this will influence decision making processes, control and sourcing and investment of funds.