The Effect of Ownership Structure on the Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

The issue of corporate governance has become obverse and centre of the agenda for both business leaders and regulators all over the world. Shareholders are always regarded as the corporate owners, while directors are agents or representatives of shareholders who are supposed to allocate business resources in a way to increase their wealth. In Kenya, a number of problems relating to the way companies are controlled and directed have been identified. These problems range from errors, mistakes to outright fraud. The origins of these problems range from concentrated ownership, weak incentives, and poor protection of minority shareholders to weak information standards. The research sought to establish the effect of ownership structure on the financial performance of firms listed at Nairobi securities exchange, the study was based on transactions cost theory, the agency theory and steward theory. Both cross sectional and descriptive survey method were employed. The target population consisted of all the stocks listed at NSE as at 31st December 2014. Secondary data was used in this study; specifically the study used financial statements the data was coded using SPSS (version 21). Descriptive statistics was used to summarize the data, this included the use of weighted means, standard deviation, SPSS (version 21) has descriptive statistics features that assisted in variable response comparison and gave clear indications of response frequencies. Pearson moment correlation was conducted to establish the linear relationship between study variables. Regression analysis was conducted to establish the nature of the relationship. The study noted that ownership structure is one of the most important factors in shaping the corporate governance system of any country and that study found ownership concentration alleviates the conflict of interest between owners and managers thus promoting better monitoring, capital requirements not only strengthen financial stability by providing a larger capital buffer, but also improve firm’s efficiency, bigger firms are in better position to raise the barriers of entry to potential entrants as well as gain leverage on the economies of scale to attain higher profitability, older firms are better experienced in choosing and employing information, experience and organizational competencies provided by age help firms to develop their operations in more efficient way, especially the operations relating innovation. The study concludes that ownership structure, ownership concentration, increase in firm and firm size had a positive impact of financial performances of companies listed in NSE. The research recommends that the firms’ should therefore strike a balance between their choice of capital structure and ownership concentration as they were found to effect on its performance as it affect the shareholders risks, returns and the cost of capital. firms should equally watch over growth in financial leverage as this would undermine their performance, the study recommend that, firm managers should monitor the institution's growth to ensure that both size and age increase with firm performance.