Global Journal of Commerce & Management Perspective
Open Access

Abstract

Post Global Financial Crisis and the Performance of Firms Listed at the NSE, Kenya

Dennis Osoro Maranga and Dr. Ambrose Jagongo

After the well-known financial crisis of 2008, financial institutions came up with stricter regulations on the minimum capital required for banks. The Kenyan banking sector has therefore been well capitalized generally and at a position to support firms in unstable periods. However the performance of firms has not been impressive. The major purpose of this study was to determine the impact of the post global financial crisis on the performance of firms listed at the Nairobi securities exchange. The data was obtained from the Nairobi securities exchange handbooks. The data of 42 non-financial firms from the year 2009 to 2016 was used. Financial firms were left out because they are regulated by the Central bank of Kenya. The data was analysed using SPSS version 20.0. 13 ratios, obtained from the NSE, Kenya non-financial firms, were used in factor analysis. From this factor analysis run, the Kaiser-Meyer-Oklin Measure of sampling adequacy of 0.516 was adequate for factor analysis. Since each variable exhibited communality greater than 0.5 after extraction, none of the variables were removed hence there was no need of running the factor analysis again. Six factors were extracted as a result of this method. These six factors accounted for 86.435 percent of the accumulated variance. Factor 1 had net profit margin, ROA and ROE which can be traced back to the theoretical perspective to represent profitability. Factor 2 has current ratio, total debt to total asset ratio and total debt to total equity ratio which represents solvency and liquidity ratio. Factor 5 has DPS and pay-out ratio representing profitability while Factor 3 and 6 have EPS and P/E ratio respectively which also represent profitability. Factor 4 has total asset turnover and fixed asset turnover which represent the efficiency of operating the business. This showed that financial ratios can be reduced using factor analysis and hence avoid the problems of severe multicollinearity in a regression analysis arising from having many independent variables. It also shows that these many financial ratios tend to explain similar concepts. But you cannot choose one and leave the other since each has a certain contribution to performance of the firms. It was found that there is a significant statistical relationship between factor 2 (current ratio, net profit margin, Total debt to total asset ratio and Total debt to total Equity), and factor 6(P/E ratio) and market to price book value for the Nairobi securities exchange. It was also found that factor 1, factor 3, factor 4 and factor 5 have p values greater than the benchmark value of 0.01 implying there is no statistically significant relationship between these factors (net profit margin, ROA, ROE, EPS, and DPS, pay-out ratio, total asset turnover and fixed asset turnover) with the market price to book value ratio. From the regression equation (1) above, profitability ratios, Operational efficiency ratios and dividend ratios have a positive relationship with the performance of firms of firms listed at the Nairobi securities exchange. However the Returns per share had a negative relationship with the performance of firms listed at the NSE, Kenya. Hence this study contributed to the literature in the sense that the relationship between market price to book value ratio and the profitability ratios, operational efficiency ratios and dividend ratios should be keenly followed as they positively affect the performance of firms during the post global financial crisis. The returns on shares and debt management should also be seriously monitored as it can impact greatly on a firm. The study suggests that firms should have control over current ratio, net profit margin, Total debt to total asset ratio and Total debt to total Equity so as to ensure the firm is on the path of positive performance. They should also control their dividend policy and also ensure their share prices are not overvalued as this can have a negative effect on the performance of firms listed at the Nairobi securities exchange.