The relationship between operational efficiency and financial performance of firms listed at the Nairobi securities exchange

Abstract

The operational efficiency aspect for any type of business is vital and must be considered by managements in order to earn healthy and sustainable financial performance. Operational efficiency is the proficiency of a corporation to curtail the unwelcome and maximize resource capabilities so as to deliver quality products and services to customers. Kenya has experienced significant transformations since the inception of Nairobi Securities exchange, in terms of growth due to local and foreign direct investment such that it has emerged fourth in sub-Saharan Africa and one of the most active securities market in the whole of |Africa. Besides the solid profitability the market has brought to the various listed firms, it has also contributed to the stability of the financial market and economic development of Kenya in general. As a result, the study of financial performance determinants, specifically operational efficiency has provoked academic research, corporation‟s management, financial market and regulatory interests (Athanasoglou, Brissimis & Delis, 2008). The objective of this study was to examine the relationship between operational efficiency and the financial performance of firms listed at the Nairobi securities exchange. The study also used other five control variables which are: Financial leverage, Liquidity, Size of the firms, capital adequacy and real interest rates to also test whether they have a relationship with ROA of firms listed at the NSE. This study covered a five year period from 2009 to 2013. Descriptive research design was used and secondary data was collected from World Bank and the annual reports of firms listed at the NSE. Data was then analyzed using a regression analysis model and statistical softwares namely: SPSS version 21 and Microsoft Excel 2010. The results of analysis were then interpreted using tables. The findings showed that operational efficiency positively impacts on the ROA of the firms listed at NSE. The effect of operational efficiency on ROA is statistically significant at 5% level. The study therefore concludes that operational efficiency has a statistically significant relationship with ROA. The study also found that financial leverage positively affects ROA of firms listed at NSE however effect is not statistically significant. Liquidity positively affects ROA of the firms listed at NSE though the effect is not significant. Size of the firms listed at NSE negatively impacts on ROA and the effect is statistically significant. Both capital adequacy and real interest rates positively impacts on the return on assets of firms. However, the effect is not statistically significant. The study recommended that the managers of firms should avoid losses through forecasting the level of financial performance using fluctuations in the internal and external factors like operational efficiency, size of the firm, capital adequacy and interest rates, which affect Return on assets.