Abstract
Purpose: The study aimed at examining the mediating role of corporate diversification between ownership structure and financial performance of listed firms in Kenya. Methodology/Approach/Design: As guided by explanatory research design, 65 listed firms from 2003 to 2017 were targeted. However, panel data of 35 firms were considered after excluding suspended and delisted as far as the study period is concerned. Results: The panel regression analysis finding indicated that corporate diversification positively and significantly mediated between institutional ownership and financial performance (β = .005, p-value = .000). Furthermore, there was a negative but statistically significant mediation effect of corporate diversification between foreign ownership and financial performance (β = -.0019, p-value = .023). These mediation effects existed despite the direct effect between institutional and as well foreign ownership and financial performance being statistically insignificant. Practical Implications: The study, therefore, suggested to the management of listed firms to ensure proper implementation of corporate diversification as it transmits the effect of ownership structure on financial performance. More importantly, policymakers are suggested to streamline taxation of foreign investors, tackle malpractices in the firm leading to embezzlement of investor funds. Future studies need to enlarge the scope to incorporate unlisted firms as well as firms listed in different stock exchanges in East Africa. Other types of ownership structure as managerial, family and state need to be analyzed. In addition, other forms and measures of corporate diversification could be investigated by future researchers. Originality/Value: To attain the main objective, the study used panel regression analysis and path diagrams to examine the effect of ownership structure on financial performance via corporate diversification.
Highlights
In Kenya, the Nairobi Securities Exchange (NSE) since its inception in 1954 has been providing a trading platform for listed securities
The findings indicated a significant positive relationship between institutional ownership and firm performance
In a listed firm, ownership in firms is held by individuals or groups in form of shares
Summary
In Kenya, the Nairobi Securities Exchange (NSE) since its inception in 1954 has been providing a trading platform for listed securities. NSE remains the largest securities exchange in East and Central Africa with an average market capitalization of United States Dollars (USD) 20 billion (NSE, 2018). This has been attributed to the growing number of listed firms from 48 in 2005 to 65 in June 2018. As opined by (Leech & Leahy, 1991), owners can be identified based on their type which in the study comprised of institutional and foreign ownership This is because institutional investors are known to be the major actors given the intensity of their investment in most firms across the globe (Gharbi & Jarboui, 2017). Foreign investors play a key role given their ability to provide gigantic resources (Ongore, 2011) to diversify their portfolios (Thai, 2019)
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