The effect of ownership structure on financial performance of companies listed in the Nairobi securities exchange

Abstract

This study investigates the effect of ownership structures on financial performance of companies listed in the NSE. In particular, the study seeks to enhance understanding on the issue by finding out how the financial performance is affected by the ownership structures. The study is conducted based on a sample of sixty two companies listed on the Nairobi Securities Exchange during the period 2008-2013. Ownership structure relates to the decision making segment of the firm. The term ‘ownership structure’ has two widely applied dimensions: ownership concentration and owner identity. Ownership concentration measures the degree of concentration of voting rights. The voting rights of the largest shareholder and the sum of voting rights of the second and third largest shareholder measures it. Ownership identity was further broken down into foreign ownership, institutional ownership, Government ownership and diverse ownership. The empirical analysis on the effects of ownership structure on financial performance is conducted on the whole population of the companies listed in the Nairobi Securities Exchange. Empirical analysis is conducted using the linear regression analysis method. The Study found out the financial performance of Kenyan firms can best be explained the ownership concentration and ownership identity. The study found a positive relationship between ownership concentration and financial performance. A positive relationship between financial performance and ownership identity was also observed. These results have important implications on policy and therefore provides a number of policy recommendations, such as showing a need to reasonably diversify shareholding as a way of attracting more skills and competencies among the shareholders that can be tapped to improve firm performance.