The effect of Interest rate volatilityon financial performance of Class “A” Road construction companies in Nairobi County

Abstract

The return of any firm is a product of the interaction of various factors with different contribution towards the returns. This study was designed with the aim of establishing the determinants on financial performance in Class “A” construction companies in Nairobi County. The study was a descriptive study on 16 of 48 registered companies using time series data for the five years from 2008 to 2012. A regression model was used to determine the relationship between returns of the companies and four factors, namely, interest volatility, working capital, growth and age. However, due to the nature of the data, age was regressed with return on assets of each company on a crosssection basis, unlike the other variables which were done on time series basis per company. The level of accuracy of the regression analysis was at 95% confidence level. The significance of the constant terms and the coefficient from the regression was tested using the t-test; the significance of the regression model was done using the F-test; correlation was tested using the Pearson’s correlation coefficient, while the coefficient of determination was used to determine how much variation in return was explained by variation in the independent variables. The results show that age of the companies had a significant and positive effect on return. However, the regression analyses per company showed no statistically significant relationship between return and interest volatility, working capital and growth. The study consequently recommends putting in place policies to make these companies competitive irrespective of their age in order to make the road construction business competitively cheaper without compromising quality.