The Relationship Between Ownership Structure and Firm Performance: an Empirical Analysis of Listed Companies in Kenya

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THE EFFECTS OF OWNERSHIP STRUCTURE AND BOARD EFFECTIVENESS ON FIRM PERFORMANCE: NEW EVIDENCE FROM KENYA

Vincent O. Ongore, PhD
Assistant Commissioner
Kenya Revenue Authority
P.O. Box 48240-00100, GPO
Phone: + 254 (20) 310900
Mobile: +254 723854796
Nairobi.
Email: Vincent.ongore@kra.go.ke

Abstract
Research on corporate governance is very thin on the role of owners on corporate performance, especially how risk-taking orientation of owners comes to bear on decision making processes of the firm. The Board has been given inordinate attention in corporate governance literature, and yet a lot of corporate failures and malfeasance have occurred in spite of effective boards. This raises the question of whether the board alone is sufficient in corporate governance. The study therefore, investigated the combined effects of ownership structure and board effectiveness on performance of listed companies in Kenya using agency theory as an analytical framework. Ownership structure was operationalized in terms of ownership concentration and ownership identity, while elements of board effectiveness were leadership, stewardship, monitoring and reporting. Measures of performance were Return on Assets, Return on Equity and Dividend Yield. Using Pearson’s Product Moment Correlation, Logistic Regression and Step-Wise Regression, the study found that Ownership Concentration and Government Ownership have significant negative relationships with firm performance. On the other hand, Foreign Ownership, Diffuse Ownership, Corporation Ownership, and Manager Ownership were found to have significant positive relationships with firm performance. The Board has no effect on firm performance. Key Words: Ownership Structure; Ownership Concentration; Ownership Identity; Firm Performance; Board Effectiveness

INTRODUCTION AND RESEARCH OBJECTIVE

This paper reports the findings of a study conducted to establish the combined effects of ownership structure and board effectiveness on performance of listed firms in Kenya. The country has experienced turbulent times with regard to its corporate governance practices in the last two decades, resulting in generally low corporate profits across the economy (Anyang’-Nyong’o, 2005). Coincidentally, this picture is fairly well replicated globally in the same period. From the global perspective, the history of corporate governance systems is now well documented. According to Gomez (2005), the past one decade or so has however, witnessed significant transformations in corporate governance structures, leading to increased scholarly interest in the role of board of directors in driving corporate performance. Arising from many high profile corporate failures, coupled with generally low corporate profits across the globe, the credibility of the existing corporate governance structures has been put to question. Subsequent research (Shleifer and Vishny, 1997; Shleifer, 2001; Jensen, 2000) has thus called for an intensified focus on the existing corporate governance structures, and how they ensure accountability and responsibility. The now well-publicized cases of Enron Corporation, Adelphia, Health South, Tyco, Global Crossing, Cendant and WorldCom, among others, have repeatedly been put forward as typical scandals that justify corporate governance reform and the need for new mechanisms to counter the perceived abuse of power by top management. Monks (1998) argues that the numerous cases of corporate failures are an indictment of the effectiveness of the existing corporate governance structures. Initially, these financial scandals appeared primarily to be an American phenomenon, arising from overheated U.S. stock markets, excessive greed, and a winner-take-all mindset of the American society. Over the past ten years, however, it has become clear that the vice of managerial fraud, accounting irregularities and other governance abuses is a global phenomenon, afflicting many non-U.S. companies including Parmalat,...
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