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

Abstract

The overall objective of this study was to establish the relationship between ownership structure and financial performance of firms listed at the Nairobi Securities Exchange. The specific objectives of the study were; to determine the relationship between foreign investors’ shareholding and financial performance, to determine the relationship between local institutional shareholding and financial performance and to determine the relationship between local individual shareholding and financial performance. The study used a descriptive research design. A census of all firms continuously listed on the Nairobi Securities Exchange between 2010 and 2014 was conducted. 58 companies qualified for inclusion in the study. Secondary data obtained from the Nairobi Securities Exchange handbook and annual returns of shareholding distribution by listed companies. Karl Pearson coefficient of correlation was used to evaluate the relationship between variables while multiple regression analysis was used to evaluate the effect of independent variables on return on assets. The study found that there existed a weak positive relationship between the percentage of foreign shareholding and return on assets. The result of ttest established that the relationship was not statistically significant at 5% level of significance. Local individual shareholding and return on assets were found to have a weak negative relationship; the relationship was not statistically significant at 5% level of significance. Local institutional share holding and return on assets were found to have a weak negative relationship. The relationship was not statistically significant at 5% level of significance. The result of regression indicated that percentage of shareholding by foreign investors had a negative effect on return on return on assets. However, using t-test the effect was found to be statistically insignificant at 5% level of significance. Percentage of shareholding by local individual investors had a negative effect on return on assets but the effect was not significant at 5% level of significance. Also the percentage of shareholding by local institutional investors had a negative effect on return on assets. However the result of t-test indicated that the result was not statistically significant at 5% level of significance. The study found that the assets turnover and leverage had a positive effect on return on assets. However the effect of assets turnover was not statistically significant while the effect of leverage was statistically significant at 5% significance level. The result of F-test indicated that the regression coefficients were collectively significant at 5% level of significance. The coefficient of determination R2 for the regression model was 21.7%. The study concluded that ownership distribution had a negative relationship with financial performance of firms listed on the Nairobi Securities Exchange but the relationship was not statistically significant. It also concluded that ownership distribution did not have a significant effect on the financial performance of listed companies. Further the study concluded that variations in ownership distribution, assets turnover and leverage had a moderate explanatory on the financial performance of companies listed on the Nairobi Securities exchange. This study recommended that managers of companies should not focus in placing the shares of their companies with a particular group of investors because the distribution of shareholding has not significant effect on their firms’ financial performance. In addition in selecting investment share investors, investment analysts and advisors should not consider the ownership distribution of a particular stock because such distribution does not have a significant effect on firms’ financial performance. Further research may seek to evaluate the effect of ownership distribution on market value of listed companies. In addition further research may consider the effect of the percentage of shares held by employees on financial performance of companies in addition to considering the effect of government stake in companies listed on the Nairobi Securities exchange.