The Effects of Diversification on Growth of Companies Listed in the Nairobi Securities Exchange

Abstract

In fiance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents. The concept behind this study was that firms tend to diversify so as to enhance growth and their value to be increased. This can be supported by theories discussed in the study and those gives evidence and predict outcomes of diversification on growth of companies although in a different environment.Greenley (1989) wrote that growth can be achieved in a number of ways such as internal resources and personnel development, external acquisition, merger, joint venture and other strategic alliances. Financial growth can also be achieved by improving efficiency, financial control and increasing turnover. This study intended to establish the effects of diversification on growth of listed companies in the Nairobi Securities Exchange. Specifically, the paper studies the relationship diversification on the growth of listed companies in the Nairobi Securities Exchange. To achieve this aim a census of companies listed in the Nairobi Security Exchange was done using, a model that incorporated measure of growth being the dependent variable and measures of diversification being the independent variables was formulated and regression analysis was carried to come up with the results. The results of the findings was that R squared was consistent with the agency theory and showed that companies had positive relationship between the growth and firms size, the relationship variables was also not very strong, and this provided evidence to the policy that there are other factors that affect the growth of the companies other than diversification. This also cannot be a valid conclusion to deter firms from diversifying since by doing so they also end up reducing risk that might face them in future.