Effect of Firm Level Factors on Financial Performance of Listed Firms in the Nairobi Securities Exchange

Abstract

The Kenya government and the private companies have put great efforts in ensuring the existence of a favorable environment for doing business in the country and more so for listed firms. Consequently, while some firms listed in the NSE have improved in performance, there are others that have experienced declining fortunes and some have even been delisted from the NSE over the last decade. The general objective of the study was to determine the effect of Selected Firm Level Factors on Financial Performance of financial and non-financial firms in the Nairobi Securities Exchange. The specific objectives of the study was to determine the effect of leverage, liquidity, asset tangibility, firm size and to determine the moderating effect of firm age on the relationship between firm level factors and financial performance of listed firms in the Nairobi securities exchange. The study employed cross sectional research design. This study targeted all the 64 firms listed on the Nairobi Securities Exchange. A census of all the 64 firms listed in Nairobi Securities Exchange was used as a unit of analysis. Secondary data extracted from the financial statements was used to compute the relevant ratios and encompassed panel data. The study employed a dynamic panel data regression and spearman’s correlation to test the relationship between the variables across the sectors. Test of hypothesis was done at 95% confidence interval. The study found out that there was a negative and significant relationship between leverage and financial performance of financial and non-financial firms. There was a positive and significant relationship between liquidity, assets tangibility, firm size with financial performance of financial and non-financial firms. Firm age was revealed to be a good moderator on the relationship between firm level factors and financial performance. Based on the findings, the study concluded that liquidity, asset tangibility and firm size have a positive and significant effect on financial performance while leverage has negative and significant effect on financial performance as measured using ROA and ROE for both financial and non-financial firms listed in NSE. The study recommended for policy makers of the listed firms to embrace leverage, liquidity, asset tangibility and firm size on their strategic decision-making. These indicators will further guide in expanding the interpretation of the financial dynamics in the listed firms at the Nairobi securities exchange and other related firms. Since the study concentrated only on firms listed at the NSE, further studies can explore non-listed firms and incorporate other variables that influence financial performance such as exchange rates, economic growth, interest rates and inflation.