The relationship between ownership and financial performance of companies quoted on the nairobi stock exchange (nse)

Abstract

The research study sought to establish the levels of ownership of companies on the NSE and how it affects performance of the companies. The study focused on how foreign or domestic ownership may have an influence on the performance of the companies. The ownership structure of companies is expected to influence performance of the companies and the drive by the Kenya government to encourage foreign ownership to spur economic growth and create jobs influenced the choice of the study area. The significant gains expected from foreign ownership of companies can only be exhibited by how well they are able to utilise resources for the common good. Companies listed on the NSE have mixed ownership with some fully domestic owned while others have both foreign and local ownership. The level of ownership was measured on a scale of 1 with those with fifty-fifty ownership showing a ratio of 0.5 for local and 0.5 for foreign ownership. Empirical studies have shown mixed results with majority showing that foreign ownership has a positive influence on performance of firms and vice versa. Performance was measured by return on equity for all the firms over a five year span between 2005 and 2009. The research established that foreign ownership has a positive influence on the performance of companies on the NSE. Domestic ownership was observed to have a negative influence on the performance of firms quoted on the NSE. Foreign companies have substantial investments in proprietary technology and knowledge, superior management skills and access to large amounts of capital. Domestic firms on the other hand are expected to have a home advantage brought about by social and cultural factors and political leverage. The findings from the study may help improve policy development by the government as the results indicate that foreign ownership is able to create greater economic benefits for the shareholders. Probably, increased foreign ownership is what companies at the NSE should be seeking to enhance creation of shareholder value.