The influence of privatization, ownership structure and corporate governance on financial performance of privatized companies in Kenya

Abstract

This study examined the influence of privatization, ownership structure and corporate governance on financial performance of privatized companies in Kenya. The specific objectives were to: examine whether there is a significant difference between the pre- privatized and post -privatized performance and between privatized and other listed companies; examine the influence of ownership structure on financial performance of privatized companies; establish the influence of corporate governance structures on financial performance of privatized companies and finally investigate the joint influence of ownership and corporate governance structures on financial performance of privatized companies. A sample of 8 privatized firms and a control group of 8 other listed companies was used. Performance was measured using ROA, Tobin’s Q, cost efficiency and technical efficiency. Data was obtained from prospectuses, financial reports and the NSE hand books. The cost and technical efficiency indicators were computed using the Stochastic Frontier Approach (SFA). Data was analyzed using a combination of descriptive statistics, paired t–tests and regression models. To enhance validity of the regression results, a unit root test was used to examine stationarity of data and a Hausman test was carried out to determine whether to use the Fixed Effect (FE) or the Random Effects (RE) regression model. A regression model with a robust standard error option was used to control for heteroskedasticity and contemporaneous correlation which may lead to spurious results. The study found a significant difference between the Tobin’s Q, cost efficiency and technical efficiency of privatized and other publicly listed firms. Ownership structure had a significant influence on financial performance of privatized companies. Among individual ownership variables, the government ownership had a significantly positive influence on ROA and the Tobin’s Q; but a negative influence on cost efficiency. Institutional shareholders had a significant positive influence on ROA and technical efficiency. Large individual shareholders had a significant positive influence on cost efficiency. Dispersed shareholders had a significant and positive influence on ROA but negative with cost efficiency. The corporate governance structure had a significant influence on financial performance. Among individual corporate structures, the non executive directors had a significant and positive influence on ROA, Tobin’s Q and cost efficiency while gender had a significant and negative influence on ROA. This study concluded that ownership and corporate governance structures influence financial performance of privatized companies. In view of these findings it is recommended that the Privatization Commission of Kenya should reduce government and dispersed ownership to pass more control to private investors. Some government ownership should however be retained in privatized companies to enhance shareholder confidence, protection of investments in a system with a large size of dispersed shareholders. The institutional ownership should be increased to attract managerial and technical expertise crucial to firm performance. The Capital Markets Authority (CMA) of Kenya should enhance diversity in the corporate boards to enable privatized firms attract managerial and technical expertise required by companies to improve financial performance. The Managers of privatized companies should reorganize corporate resources to cut costs and enhance the technical efficiency.