Relationship between cost x-efficiency and financial performance of companies listed at the Nairobi securities exchange

Abstract

This study sought to investigate the relationship between cost X-efficiency and financial performance of companies listed in the Nairobi Securities Exchange in Kenya,. The study findings concludes that Cost X-inefficiency may arise because managers use more input than would a best-practice firm (technical inefficiency) or because they employ an input mix that does not minimize cost for a given input vector, moreover its established that X-inefficiency arises from the fact that “neither individuals nor firms work as hard, nor do they search for information as effectively, as they could.” More specifically, the results exits that cost X-efficiency as the ratio of the minimum costs that could have been expended to produce a given output bundle to the actual costs expended and varies between 0 and 100 percent. X-efficiency stems from technical efficiency. The 46 businesses and companies listed in the Nairobi Securities Exchange formed the population of the study. The sample comprised of firms’ listed in the NSE who’s published financial data is available continuously over the sample period of the study 2006 to 2011. The sample included firms in the following sectors, Agriculture, Automobile and accessories, Banking, Commercial & Services, Construction & Allied, energy and Petroleum, Insurance and Investment firms. The findings established that assets management measures demonstrate how efficient management uses a firm’s assets to generate sales over a certain period of time. Asset management ratios (asset utilization ratios) show how efficiently and intensively assets are used to create sales efficiently and intensively. These ratios include, for example, inventory turnover, receivable turnover and assets .Moreover the study findings establishes that sell assets to increase their operating efficiency are typically poor performers. Firms are to sell their own assets if they find that alternative funding is too expensive and thus portend that total assets and cost of raw material and sales expenses significantly leads to a higher firm performance.