Equity Structure and Corporate Performance. A Case of the Kenyan Oil Industry

Abstract

This study examines the effects of ownership structure on corporate performance of Kenyan oil sector firms between 2001-2005. Ownership structure is defined along two dimensions: ownership concentration and ownership mix. These two categories incorporate both the influence power of shareholders as well as the identity of owners with their unique incentive mechanisms and preferences. In this study, the ownership structure is considered in terms of (i) foreign Vs Local ownership, (ii) Government Vs Non Government ownership, and (iii) Institutional Vs Individual ownership. This study uses (accounting) profitability (i.e., Return on Capital Employed (ROCE)) as measures of performance. The study adopts a multi-theoretic approach to investigate the impact of diverse shareholders on the performance of emerging economy oil firms. Overall, the findings confirm that there is a positive association between foreign ownership and firm performance. The study shows that domestic corporations positively influence firm performance although not at the same magnitudes as for foreign corporations. Nevertheless, the result assumes significance only if domestic corporations hold large blocks of shares, which enhances their monitoring abilities and incentives Also, it is found that firms with Institutional ownership do not perform better than those with Individual ownership in Kenys, A less significant relationship is found for Government Ownership. The study recommends inward FDI is an essential element to introduce a new way of thinking, stimulate competition, and catalyze necessary reform. Inward FDI helps move the Kenyan economy a step towards substantial reform. Considering the possibility of market failures, there are good reasons for the government to conduct inward FDI promotion policies.