The relationship between firm size and financial innovation of firms listed at the Nairobi Securities Exchange

Abstract

The researcher examines the relationship between firm size and Financial Innovation (FI) of firms listed at the Nairobi Securities Exchange (NSE) using census data for the years 2010, 2011 and 2012. Based on the available data, a sample of 41 out of the total population of 62 firms listed at the exchange during the study period is constructed. The natural logarithm of average turnover is used as the proxy to measure firm size while Research and Development (R&D) expenditure and patenting propensities are the proxies used to measure FI. Both descriptive and inferential statistics where data was fitted simultaneously into the regression model in Microsoft Excel was used in data .analysis . The results are that firm size and FI are indeed related. However, the results do not support the generally established U-shaped relationship between firm size and FI, where both small and large firms are known to perform more innovation than medium sized firms. The study found out that while large firms perform better than medium and small firms in FI as argued by international literature, small firms do not outperform medium firms at the NSE. The study also reviews the policy implications and benefits of firm size and FI. The model predicts that firm growth eventually decline unless the firms carry out FI. The researcher recommends further empirical and analytical study of FI and its precise impact on performance of firms of different sizes in different research settings and under varying environments.