The Relationship Between Chief Executive Officer Turnover and the Financial Performance of Manufacturing and Construction and Allied Companies Listed in the Nairobi Securities Exchange

Abstract

This research project studied the relationship between the turnovers of Chief Executive Officers and firm performance for firms listed in the Nairobi Securities Exchange under the manufacturing and construction and allied sectors for the period 2010 – 2015. CEO turnover can be used a corporate governance tool to control top management behaviour. However, CEO turnover is influenced by the capital structure of an entity, board independence, ownership composition and other factors. Sometimes, CEO turnovers are caused by factors beyond the control of the CEO which has led to inconsistent results in previous researches on the impacts of CEO turnovers on firm performance. The research design used for this study was a descriptive cross-sectional research framework. The population for this study is 15 companies and the research was a census of all the organizations. Secondary data which was obtained from company financial statements was used for the study. Return on assets was used to measure performance, CEO turnover was the independent variable and firm leverage the controlling variable. The study used the SPSS software version 20 to analyse the data and a multiple linear regression model was also used to determine the relationships between the turnover of CEOs and firm performance. A multicollinearity diagnostic test and tests for normality were conducted on the variables. The tests indicated that there was no multicollinearity as both ROA and CEO turnover had a VIF of 1.009 which is less than 10. The study findings revealed a weak and negative relationship between the turnover of a CEO and the performance of the firm with a factor of -0.013. Leverage as a controlling variable also influenced performance negatively with a factor of -0.170. The relationship between the turnover of CEOs and company performance was found to be weak with a correlation coefficient of 0.318 (R=.318) and the variables explain changes in ROA by only 9.2% (adjusted R2 =0.092). The result findings showed that the impact of CEO turnover on the performance of a business, although negative, is weak and therefore recommended that proper CEO selection criteria should be used to ensure that firms appoint CEOs who are best suited to solve the challenges of the organization and to steer it into growth. More measures should therefore be undertaken to ensure that CEOs are motivated to design appropriate strategies of improving the performances of the manufacturing firms.