The relationship between ownership structure and financial performance of firms listed at the Nairobi securities exchange

Abstract

The ownership structure of a firm defines the combination of residual claims and decision control that has consequences on firm behavior. These consequences of ownership structure are conditioned by the legal and institutional setting of the country in which the firm operates. Modern firms have a variety of ownership patterns, and exploring ownership type recognizes that large-block shareholders are not homogenous and that certain types of owners have a disproportionately large impact on corporate governance. Some very large firms are dominated by large-block shareholders who have a seat on the board of directors, some by shareholders who sustain their ownership blocks over time, and some by families owning large blocks of shares. On the basis of the above studies, there has been no study that the researcher is aware of that has looked at the relationship between ownership structure and financial performance of all firms listed at the NSE especially with the number of listed firms having changed significantly over the last 4 years. This gap, led to the research question what is the relationship between ownership structure and financial performance of firms listed at the NSE. Ownership structure was operationalized in terms of ownership concentration (percentage of shares owned by the top five shareholders) and ownership identity (actual identity of shareholders). Measures of performance were Return on Assets, Return on Equity and Dividend Yield. Forty two (out of sixty one) listed companies were studied using both primary and secondary data. Reliability of data was tested using Cronbach’s Alpha, while Tolerance and Variance-Inflation Factor were used to test multicolinearity. Using Pearson’s Product Moment Correlation and Logistic Regression, the study found that Ownership structure and Government Ownership have significant negative relationships with firm performance. On the other hand, Institutional Ownership, Foreign Ownership and Individual Ownership were found to have significant positive relationships with firm performance. The main contribution of this paper is therefore, two fold. First, it dispels the long-held position that concentrated ownership supports firm performance. Second, it identifies types of ownership identities that are good for firm performance, and those that hamper it