Effect of Firm Specific Factors on Financial Performance of Commercial State Corporations in Kenya

Abstract

The financial performance of commercial state corporations is critical to their sustainability and contribution to economic development. However, the factors that drive financial performance in these entities are not fully understood, particularly in the context of developing economies like Kenya. This study was motivated by the need to explore the effect of firm-specific factors on the financial performance of commercial state corporations in Kenya, given the strategic importance of these organizations in the public sector. The study aimed to establish how variables such as own source revenue, liquidity, firm size, and managerial efficiency influence financial performance, measured by ROA. The research was anchored on three key theories: agency theory, resource-based view theory, and transaction cost economics theory. These theories provide a framework for understanding how internal factors within the firm can influence financial outcomes. A descriptive panel research design was adopted, utilizing secondary data from 28 commercial state corporations in Kenya over a five-year period (2019-2023). The study employed descriptive statistics, correlation analysis, and panel regression analysis to examine the relationships between the independent variables and financial performance. The findings revealed that own source revenue (Coefficient = 1.434, p = 0.002), liquidity (Coefficient = 0.577, p = 0.023), and managerial efficiency (Coefficient = 0.798, p = 0.017) had significant positive effects on ROA. Firm size, however, did not show a statistically significant impact on financial performance (Coefficient = 0.017, p = 0.935). The overall model was statistically significant (F(4, 140) = 8.46, p < 0.0001), with an R-squared value of 0.096, indicating that approximately 9.6% of the variation in financial performance was explained by the firm-specific factors included in the model. The study concluded that internal factors, particularly own source revenue, liquidity, and managerial efficiency, are crucial determinants of financial performance in commercial state corporations in Kenya. The lack of significance of firm size suggests that other operational and management efficiencies are more important in driving financial outcomes than the sheer scale of the corporation. Based on these findings, it is recommended that commercial state corporations focus on enhancing their revenue generation capabilities, improving liquidity management, and optimizing managerial efficiency to boost their financial performance. For future research, it is suggested that similar studies be conducted over a longer timeframe to capture long-term trends in financial performance. Additionally, qualitative research methods could also complement the quantitative analysis by exploring the underlying processes that drive financial performance in these organizations.