Effect of Firm Characteristics on the Financial Health of Listed Investment Companies in Kenya

Abstract

The financial health of investment companies is critical for their sustainability and contribution to economic development. However, limited empirical evidence exists on how firm-specific characteristics influence financial health in the Kenyan context. This study aimed to determine the effect of management efficiency, firm size, liquidity, and leverage ratio on the financial health of listed investment companies in Kenya. Anchored on modern portfolio theory and supported by the capital asset pricing model, the study sought to provide insights into the key determinants of financial performance within the sector. A descriptive panel research design was adopted, using secondary data from five listed investment companies for the period 2014–2023. Panel regression analysis was performed, and diagnostic tests were conducted to ensure the validity and reliability of the model. The findings revealed that the overall model had an R-squared value of 0.1243 (within), 0.4621 (between), and 0.3808 (overall), indicating that firm characteristics explained a moderate proportion of the variation in financial health. Management efficiency positively influenced financial health with a coefficient of 0.55925 (p = 0.000), demonstrating the significance of cost optimization in enhancing performance. Firm size also had a positive and significant impact, with a coefficient of 0.789686 (p = 0.000), suggesting the benefits of economies of scale. Liquidity showed the strongest positive influence, with a coefficient of 0.944533 (p = 0.000), emphasizing the importance of maintaining sufficient current assets. In contrast, leverage ratio had a negative but statistically insignificant effect (coefficient = -0.21532, p = 0.215), indicating that debt utilization had minimal impact on financial health in this context. The study concluded that management efficiency, firm size, and liquidity are key drivers of financial health among listed investment companies in Kenya, while leverage ratio plays a limited role. These findings underscore the importance of strategic resource management, firm growth, and liquidity optimization in achieving financial sustainability. The study recommended that investment companies enhance management practices, pursue growth strategies to leverage economies of scale, and adopt robust liquidity management frameworks. Policymakers should support these efforts by offering incentives for growth and capacity-building initiatives to strengthen financial management capabilities. Future research should broaden the scope to include non-listed firms and other sectors to enhance the generalizability of the findings. Incorporating macroeconomic variables and industry-specific factors would provide a more comprehensive understanding of the determinants of financial health. Additionally, longitudinal studies examining long-term trends and qualitative analyses exploring stakeholder perspectives could offer richer insights into the sustainability of financial health strategies.