Firm Characteristics on the Performance of Companies Listed at the Nairobi Securities Exchange, Kenya

Abstract

Under the Kenya vision 2030 the financial sector aims at creating a competitive and vibrant economic and financial performance in Kenya. This study aimed to find the effect of firm characteristics on performance companies trading at the Nairobi Securities Exchange. The specific objectives were to; find the effect of financial leverage on performance of companies trading at the Nairobi Securities Exchange, find the effect of liquidity on performance of companies trading at the Nairobi Securities Exchange, find the effect of asset tangibility on performance of companies trading at the Nairobi Securities Exchange and to find the moderating effect of ownership concentration on the relationship between the selected firm characteristics and financial performance of companies trading at the Nairobi Securities Exchange. The Pecking Order Theory, Liquidity Preference Theory, Resource Based Theory and the Agency Cost Theory were used to anchor the objectives of this study. For the study, causal or explanatory research design was employed. The study targeted all trading and consistently participating on the Nairobi Securities Exchange from 2008 to las 2019. Purposive sampling technique was used to select a sample of 38 listed companies that had consistently traded at the NSE for the period from which complete data was obtained. The research used secondary data obtained from annual reports of firms listed at the NSE collected using document review method and recorded in a data collection sheet. Augmented Dickey-Fuller (ADF) Fisher Chi-square methodology was used to determine reliability; Financial leverage had a positive relation with ROA (β = 0.143, p = 0.0469); the effect on financial performance as measured by Tobin’s the effect of financial leverage on company performance emerged to be positive on Tobin’s Q as a measure of financial performance (β = 0.392, p = 0.0204). Liquidity had a negative effect on ROA as a measure of performance as indicated by beta coefficient and probability (β = -0.130, p = 0.0151). Additionally, it was revealed that the effect of liquidity on financial performance as measured by Tobin’s Q is negative and significant (β = -0.1263, p = 0.0409). Results showed that the effect of asset tangibility on company performance measured by ROA is significantly negative (β = -0.1355, p = 0.0000). It was further found that the effect of asset tangibility on company performance measured by Tobin’s Q is negative (β = -0.2587, p = 0.0000). It was further found that ownership concentration is a significant moderator of the relationship between trading companies’ characteristics and their performance. Specifically, ownership concentration moderates the relationship between leverage and firm performance measured by ROA (β = 0.254, p = 0.0000), the relationship between liquidity and firm performance measured by, ROA (β = 0.081, p = 0.0291) and the relationship between asset tangibility and firm performance measured by ROA (β = -0.049, p = 0.0484). The study established that ownership concentration did not moderate the relationship between debt-to-equity ratio and firm’s Tobin’s Q (β = 0.192, p = 0.0567), liquidity and firm performance as measured by Tobin’s Q (β = -0.362, p = 0.4238), and asset tangibility and firm performance measured by Tobin’s Q (β = -0.274, p = 0.5322). From the above findings the study concluded that the financial leverage has a positive and significance in the performance of the firms listed in Nairobi Securities Exchange. The research concluded that the Asset tangibility has a negative influence on the performance of firms listed in the Nairobi Securities exchange. The study recommends for the firms to spur financial performance there should be increase in the levels of leverage. The study also concluded that the firms should reduce the liquidity of the assets accordingly so as to spur the financial performance of listed firms in the Nairobi Securities Exchange. The study suggests further research to be done on the firms which are not listed in the Nairobi Securities Exchange but are critical in the economy.