The Effects of Corporate Diversification on Financial Performance of Non-financial Firms Listed at the Nairobi Securities Exchange

Abstract

Diversification refers to a process of distributing the wealth of an organization in optimal portfolios that would guarantee optimal returns. Diversification is used to maintain firm competitiveness so as to achieve value creation through economic of scope, financial economies, or market power. There is a great practice of corporate firm performance diversification in Kenya by most of the investors and companies. By diversifying, managers form internal resource markets where capital distribution is more proficient as a result of lower levels of disproportionate information. This study sought to find out the effects of corporate diversification on financial performance among non-financial firms whose shares were trading on the Nairobi Securities Exchange. The main variables that were used to measure the financial performance were related products diversification from the core products, unrelated product diversification and geographical diversification. Descriptive research design was applied using secondary data for the period 2011 to 2015. The findings show high performance was registered by firms that diversified across product lines. The study found out that geographical diversification strategy greatly influenced firm performance. The research findings also showed that on average non-financial firms listed at the NSE were diversified. Diversification strategies had a strong and positive relationship with firm performance. The findings show the relevance of the product diversification strategy in the levels of firm performance registered by non-financial firms trading at the NSE, thus the study concludes that by integrating both the product dimension of diversification into the operations of firms at the NSE, this would lead to improved financial performance. The study recommends that the listed non-financial firms listed at NSE are completely different in terms of their operations expenses that lead to the recorded firm performance. Diversification leads to better firm performance in the long run as poor performance in one market or product line is compensated by better performance in other markets and product lines. Diversification increases the market share and the growth prospects of firms. This study therefore recommends that firms pursue diversification strategy to diversify their risk exposures.