The relationship between firm size and financial innovation of firms listed at the Nairobi Securities Exchange
Abstract
The researcher examines the relationship between firm size and Financial Innovation (FI) of
firms listed at the Nairobi Securities Exchange (NSE) using census data for the years 2010, 2011
and 2012. Based on the available data, a sample of 41 out of the total population of 62 firms
listed at the exchange during the study period is constructed. The natural logarithm of average
turnover is used as the proxy to measure firm size while Research and Development (R&D)
expenditure and patenting propensities are the proxies used to measure FI. Both descriptive and
inferential statistics where data was fitted simultaneously into the regression model in Microsoft
Excel was used in data .analysis .
The results are that firm size and FI are indeed related. However, the results do not support the
generally established U-shaped relationship between firm size and FI, where both small and
large firms are known to perform more innovation than medium sized firms. The study found out
that while large firms perform better than medium and small firms in FI as argued by
international literature, small firms do not outperform medium firms at the NSE. The study also
reviews the policy implications and benefits of firm size and FI. The model predicts that firm
growth eventually decline unless the firms carry out FI. The researcher recommends further
empirical and analytical study of FI and its precise impact on performance of firms of different
sizes in different research settings and under varying environments.