Effect of Ownership Structure on Financial Performance of Companies listed at the Nairobi Securities Exchange in Kenya

Abstract

There is a direct link between ownership structure and firm’s financial performance because performance of firms mostly depends upon the strategic decisions carefully designed and taken by the owners. Owners are part of decision making segment as they have economic relations with the firm and have powers to influence firm’s decisions. However the traditional approach to corporate governance has typically ignored the unique influence that firm owners exert on the board, and by extension, the top management in making firms decisions. Therefore the question of what may be the most efficient ownership structure is relevant. This study aimed to determine the effect of ownership structure on firm’s financial performance and was guided by the following specific objectives: to determine the effect of state ownership on firm’s financial performance; establish the effect of local ownership on firm’s financial performance: investigate whether foreign ownership affect firm’s financial performance and finally determined whether managerial shareholding affect firm’s financial performance. The study adopted cross-sectional survey design. A sample of 39 firms was drawn using stratified random sampling. The target populations of the study were the 61 companies listed in Nairobi Securities’ Exchange. Primary data was collected using Questionnaires while secondary data collection sheet was used to collect secondary data. The study focussed on listed firms only. Using collected data, univariate tests were used to provide an insight using both parametric (t-test) and non-parametric test (Pearson correlation coefficient). In multivariate analysis, multiple regression analysis models were used to determine the type of the relationship that existed between the independent and dependent variables. Hypotheses were tested by regressing independent variables against dependent variable, financial performance. The study findings indicated that all types of ownerships structures had a significant positive influence on the firm’s financial performance. When all independent variables were analysed together, foreign ownership and Managerial shareholding had the highest positive significant contribution on firm’s performance. This can be attributed to the fact that foreign owners have the ability to control and monitor managers. For managerial shareholding it’s backed by the fact that managers work better in an environment where they are afforded an opportunity to own shares of the firm, have freehand to exercise their professional judgment without undue influence from shareholders. For local ownership better understanding of local environment enhances performance while government ownership boosts confidence among investors. Therefore it can be concluded that each type of ownership structure has a significant positive contribution on firm’s financial performance. The study recommends that the policy makers and government should create favourable policies to encourage balanced investment from all categories of investors and ensure that ownership does not only grow among few owners but rather spread out reasonably to diversify and attract skills and competencies to improve firm performance. Government should also retain some ownership in foreign and local firms to enhance shareholders confidence. This study included only listed firm and a further study is recommended to include even private firms and evaluate how ownership structures affects their financial performance.