This document is a research paper submitted by five students in partial fulfillment of the requirements for a Bachelor of Commerce degree from the University of Nairobi. The paper examines the effect of government shareholding on the financial performance of 12 firms listed on the Nairobi Securities Exchange. It includes a declaration confirming the originality of the work, approval from the university supervisor, acknowledgements, table of contents, list of tables, and appendices with supporting data. The paper studies both theoretical frameworks and prior empirical research on the relationship between government ownership and firm performance. It aims to contribute additional evidence from a developing country context like Kenya.

1. EFFECT OF THE GOVERNMENT SHAREHOLDING ON A FIRM’S FINANCIAL
PERFORMANCE. A STUDY OF 12 FIRMS WITH GOVERNMENT SHAREHOLDING
LISTED IN THE NSE.
GODWIN KINOTI KIMATHI
DUNCAN NYAMWEYA GESONGORI
CHEGE GEOFREY GITAU
ERIC NKANDO
ELSIE KANORIO KATHURIMA
A MANAGEMENT RESEARCH PAPER SUBMITTED IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF BACHELOR OF
COMMERCE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI
APRIL 2015

2. ii
DECLARATION
We hereby declare that this Research Project is our work and has not been submitted before for
the award of a degree at the University of Nairobi or in any other university.
Godwin Kinoti Kimathi D33/3458/2011 Signature………….. Date………….
Duncan Nyamweya Gesongori D33/2548/2011 Signature………….. Date………….
Chege Geofrey Gitau D33/2410/2011 Signature………….. Date………….
Eric Nkando D33/2415/2011 Signature………….. Date………….
Elsie Kanorio Kathurima D33/2664/2011 Signature………….. Date………….
APPROVAL
This Management Research Paper has been submitted in for information with my approval as
University Supervisor.
Signature…………………….. Date…………….…………
Mr. Jay Gichana
Lecturer
Department of Finance and Accounting

3. iii
ACKNOWLEDGEMENTS
We render our utmost gratitude to the Almighty God, for His Strength, guidance, provision and
abundant grace that enabled us start and complete the project.
Secondly, we express our profound gratitude and regards to our project supervisor Mr. Jay
Gichana for his support, wisdom and guidance in the preparation and successful execution of the
project step by step. His insight and approach in the analysis of the key focal points yielded better
analysis which helped us come to more credible conclusions that brought insight into the subject
matter under investigation. Thank you very much.
Much gratitude also goes to the CMA and the NSE for their valuable information, support and
guidance which enabled us complete this task through the various stages.
Special appreciation goes to our team leader Mr. Godwin Kinoti, for his tireless efforts to ensure
that we met regularly and for the whole team for showing much cooperation throughout the
period.
Finally, we thank our parents, relatives, friends and classmates for their support, guidance and
encouragement during the entire period of the program. God bless you all.

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DEDICATION
We dedicate this project to our God Almighty for His Strength, guidance and grace throughout
the research period.

5. v
TABLE OF CONTENTS
DECLARATION.........................................................................................................................ii
ACKNOWLEDGEMENTS......................................................................................................... iii
DEDICATION............................................................................................................................iv
ABBREVIATIONS.....................................................................................................................vi
ABSTRACT ...............................................................................................................................ix
CHAPTER ONE:........................................................................................................................ 1
INTRODUCTION ...................................................................................................................... 1
1.1 Background to the Study ................................................................................................. 1
1.1.1 Government Ownership......................................................................................... 1
1.1.2 Financial Performance of Firms................................................................................ 2
1.1.3 Government Shareholding and Financial Performance ............................................ 3
1.1.4 Nairobi Securities Exchange..................................................................................... 3
1.2 Research Problem........................................................................................................... 4
1.3 Research Objective......................................................................................................... 5
1.4 Value of the Study.......................................................................................................... 5
CHAPTER TWO:....................................................................................................................... 7
LITERATURE REVIEW............................................................................................................ 7
2.1 Introduction................................................................................................................... 7
2.2 Theoretical Review......................................................................................................... 7
2.2.1 Property Rights Theory............................................................................................. 7
2.2.2 Public choice theory.................................................................................................. 8
2.2.3 Expectation Theory................................................................................................... 9
2.2.4 Objective Based Theory............................................................................................ 9
2.2.5 Agency Theory........................................................................................................ 10
2.2.6 Signaling Theory................................................................................................... 11
2.3 Empirical Review..........................................................................................................12
2.4 Chapter Summary..........................................................................................................16
CHAPTER THREE:..................................................................................................................17
RESEARCH METHODOLOGY................................................................................................17
3.1 Introduction..................................................................................................................17
3.2 Research Design............................................................................................................17
3.2 Population of the Study..................................................................................................17
3.3 Data Collection .............................................................................................................17
3.4 Data Analysis ...............................................................................................................18
CHAPTER FOUR:.....................................................................................................................21
DATA ANALYSIS, RESULTS AND DISCUSSIONS..................................................................21
4.0 Introduction.................................................................................................................21
4.1 Data Collection and Analysis ......................................................................................21
4.2 Descriptive Statistics...................................................................................................22
4.3 Correlation Analysis....................................................................................................23
4.4 Regression Analysis ...................................................................................................27

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4.4.1 Summary of Regression Model .............................................................................. 28
4.4.2 Analysis of Variance in Regression Analysis......................................................... 29
4.4.3 Summary of Coefficients of Regression Model...................................................... 30
CHAPTER FIVE.......................................................................................................................32
SUMMARY, CONCLUSION AND RECOMMENDATIONS......................................................32
5.0 Introduction.................................................................................................................32
5.1 Summary ....................................................................................................................32
5.2 Conclusion..................................................................................................................32
5.3 Recommendations......................................................................................................33
5.4 Limitations to the study..................................................................................................33
5.5 Suggestions for further Research.....................................................................................34
REFERENCES .........................................................................................................................35
APPENDICES...........................................................................................................................39
Appendix I: List of Companies with government shareholding listed at the Nairobi
Securities Exchange ...........................................................................................................39
Appendix 2 : Raw Data .......................................................................................................41
ABBREVIATIONS
ANOVA ……………………………Analysis of Variance
ATS………………………………… Automated Trading Systems
GOV_SHAREHOLDING…………... Government Shareholding
GWT…………………………………..Growth
LIQ………………………………….. Liquidity
NSE …..................................................Nairobi Securities Exchange

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POI ……………………………………Proportion of Institutional Investors
ROA ………………………………….Return on Assets
ROE …………………………………..Return on Equity
ROI ………………………………….. Return on Investment
Sig……………………………………..Significance
SOE………………………………........State Owned Enterprise
SPSS……………………………….......Statistical Package for Social Sciences

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LIST OF TABLES
Table 1: Definition of Variables ....................................................................................................20
Table 2: Descriptive Statistics.......................................................................................................22
Table 3: Correlation Analysis........................................................................................................24
Table 4: Summary of Regression Model.........................................................................................28
Table 5: Summary of Anova .........................................................................................................29
Table 6: Summary of Coefficients of Regression Model...................................................................30

9. ix
ABSTRACT
The purpose of this study was to investigate the influence of government level of shareholding on
the financial performance of firms listed in the NSE. A total of 12 firms with varying levels of
government shareholding were selected for the study. The data was analyzed using descriptive
and multivariate analysis. ROA was used as the accounting measure of the financial performance
of the firms as the dependent variable. Government shareholding was considered as the
independent variable while the control factors included Size of the firm as depicted by its total
assets, Proportion of institutional Investors, Liquidity and Firms growth. The study established
that Government shareholding is negatively correlated with ROA.

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CHAPTER ONE:
INTRODUCTION
1.1 Background to the Study
1.1.1 Government Ownership
Government ownership of a firm can be understood from the perspective of holding of shares by
the state in the various firms. The firms which government has full ownership and control are
called state owned enterprises. The government can also hold varying proportions of shares by
acquiring shares of private companies or by selling some of its shareholding to the public.
According to Kroszner and Sheehan, (1999) whether a firm adopts government ownership or not
is influence by its corporate governance. Some scholars argue that in a competitive markets,
where basically there exists no significant externalities, government ownership is undesirable
(Dewenter and Malatesta, 2001). This can be attributed to shortcomings of government ownership
such as the governments lack of transferable residual claims, the government’s tendency to focus
on social and political goals instead profit maximization of the firm, the government’s tendency
to offer employment based on political connections rather than on merit, qualification or
expertize, there are generally higher information asymmetries in government owned enterprises
and finally the higher transaction costs in these enterprises.
In contrast to this, Kole and Mulherin (1997) suggest that government ownership can be efficient.
Government ownership should be encouraged when social benefits accrued to the citizens, are to
be considered, as the state control is able to restore the purchasing power of its citizens, Atkinson
and Stiglitz (1980). However, it should be discouraged when the incentives to innovate and
reduce costs are necessary, during times of heavy competition suppliers, when political patronage
exists and when the issue of corruption is considered.

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1.1.2 Financial Performance of Firms
Financial performance is a subjective measure of how well a firm can use assets from its primary
mode of business and generate revenues. This term is also used as a general measure of a firm's
overall financial health over a given period of time. It can be used to compare similar firms across
the same industry or to compare industries or sectors in aggregation. The financial situation of the
firm can also determine its operating performance.
Return on Equity, Return on Investment and Return on Assets are some of ratios used in
measuring financial performance.
ROI is a measure of the efficiency of how well the financial resources of an organization have
been used. It is computed by dividing the annual return generated by the investment by the
average amount of investments invested during the year. It is used in evaluating the profitability
of a business, a subsidiary, a branch or a specific investment opportunity.
ROE is a measure of the income producing ability of a company. The shareholders are interested
in understanding the return the company earns on each amount of stockholders equity. An
increase in ROE shows that the company is performing well. It is calculated by dividing net
income by average common shareholders’ equity.
ROA shows how profitable a company’s assets are in generating revenue. It indicates what the
company can do with what it has, that is earnings they derive from each assets they control. It’s a
useful number for comparing companies. The higher the ROA, the higher the performance of the
firm. This study will use ROA as a measure of financial performance given the choice of our
variables.

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1.1.3 Government Shareholding and Financial Performance
The relation between ownership structure and company performance has been an issue of interest
among academics, investors and policy makers alike. Several studies have been advanced to
establish this relationship. Most economists perceive government ownership as being harmful to
firm’s financial performance. Estrin and Perotin (1991) argues that with the government as owner,
the business will not concentrate on profit maximization since the government has both political
and economic objectives that are different from those of commercial firms and that financial
performance in such firms will be inferior due to weak governance arrangements.
According to Wang (2004) there isn’t any significant negative relationship between government
ownership and company performance.
Others studies have emphasized that government ownership is efficient and leads to improved
financial performance. According to Odipo(2010), when the state has a dominant ownership
position, it may have an incentive to closely monitor management, thus reducing agency costs for
other shareholders and increasing profitability and firm value.
1.1.4 Nairobi Securities Exchange
The Nairobi Securities Exchange was started back in 1954 when it was constituted as a voluntary
association of stock brokers registered under the Societies Act. The NSE is an example of an
emerging stock market that has been characterized by humble beginnings yet has grown
considerably over time (Kibuthu, 2005). In 2006, live trading on the automated trading systems of
the NSE was implemented. The ATS was customized to uphold the spirit of the Open Outcry
Trading Rules in an automated environment. In July 2007 the NSE reviewed the 20 share index

13. 4
and announced the companies that would constitute the index to ensure that it is a true barometer
of the market. Currently, the NSE has 64 listed companies.
1.2 Research Problem
The research of the effect of government ownership on performance of firms has previously
yielded mixed results. The researchers in various economies have come up with contradicting
results.
In their Journal of Comparative Economics, Tian and Estrin, (2008) argue that government
ownership is disadvantageous since the government is assumed to extract the firms profit for the
benefit of politicians and bureaucrats. Quoting from Schleifer and Vishny (1998), Gupta argues
that government ownership is most likely to only benefit people at the helm of the government.
On the other hand, government ownership of firms has been associated with certain positive
impacts on the financial performance of some firms. Referring to Estrin and Perotin (1991) Tian
and Estrin argue that government ownership is advantageous since the government provides
capital subsidy to its subsidiaries, the higher the ownership by the government, the higher the
subsidy. This subsidy in turn enables the firms perform better financially.
Though there is increasing empirical evidence on the impact of government ownership and
company performance in developed markets, little attention has been given to developing
countries such as Kenya. The existing literature on Kenya on government ownership structure and
performance is relatively scarce and tends to be descriptive and very brief. These include

14. 5
( Birya, 2009 and Odipo (2010). This study therefore seeks to add empirical evidence in
developing countries.
Secondly, previous studies have used certain and similar set of variables to assess firms’ financial
performance while ignoring other set of variables that are critical in influencing firms’ financial
performance. Based on this knowledge gap, we sought to analyze a different set of control
variables which other scholars haven't given much thought. Other factors that affect financial
performance apart from government shareholding include type of investors (whether individual or
institutional), size based on total assets, growth and liquidity. Due to little research on these
variables this paper will contribute greatly to the relevant body of knowledge.
1.3 Research Objective
The study aims to answer our research question; does government shareholding affect the
financial performance of firms listed at the NSE?
1.4 Value of the Study
Given the importance of ownership structure on the performance of firms listed in the NSE, the
extent of government ownership has become a major concern over the performance of such firms.
Due to the current state of affairs, knowledge of government ownership and its associated effect
on firm performance has become a center of interest for policy makers, researchers and business
practitioners.
Policy Makers: The policy makers will use this research to determine the extent in which
government should exercise ownership through shareholding on firms listed at the NSE. In doing
so, the policy makers need to examine the findings of the research in proposing policy and

15. 6
regulatory changes that will enhance performance of firms listed at the NSE. The study will also
offer insights to the policy makers on how to stir the private investments in Kenya which is
critical in achievements of Vision 2030.
Researchers: Researchers can use the findings of the study to add to the existing body of
Knowledge. The existing gaps on literature regarding government ownership and firm
performance especially in developing countries like Kenya can be a source of further research by
the researchers and academicians.
Business Practitioners: The business practitioners can use the study findings when making their
internal decisions such as sale of shares to the public and in what proportion to the government.

16. 7
CHAPTER TWO:
LITERATURE REVIEW
2.1 Introduction
There are a number of theories and empirical studies that explain the effect of government
ownership on the financial performance of firms. In this chapter, we examine both theoretical and
empirical reviews to support our study.
2.2 Theoretical Review
A great number of theories have been put forth to explain the effect of government’s ownership
on firms’ financial performance.
2.2.1 Property Rights Theory
The differences in financial performance of firms with varying levels of government ownership
can be explained from the property rights perspective. Property rights basically refer to the
theoretical constructs in economics for determining how a resource is used and owned. By this,
resources can be owned by individuals, associations or governments.
Under government ownership which is the interest of this study, Property rights theory predicts
that relinquishing government shareholding on firms will enhance inducements tied to a firm’s
financial performance by replacing the disinterested ministers with shareholders who will then
design an effective governance system out of self-interest. Under high levels of state ownership,
these property rights are therefore ill defined. The minister has no financial interest in the returns
stemming from his action. According to Alchian (1965) and Demsetz (1988) the state is the
residual claimant to the profits in SOE. Clearly, the minister is unlikely to personally benefit from

17. 8
the profits that may accrue from state firms which is an explanation to the fact that so long as
there is no personal gain and some personal cost in designing or managing an effective
governance system, the state representatives, which refers to the ministers and the body in power,
will neither work hard at monitoring managers nor designing governance systems to enhance
efficiency. This is an agency problem and to worsen it, the managers of entities that have a high
level of government ownership are insulated from the threat of takeover and bankruptcy. (Rowley
& Yarrow, 1981 cited by Odipo 2012).
2.2.2 Public choice theory
Public choice is defined as how much choice the public has in the economic decisions taken by
the government. The theory stems from political science, and is then employed in economic tools.
Under this theory, more focus is on the financial performance hence it predicts that entities with
high levels of government ownership are low performers because politicians impose objectives on
these firms that might help them gain votes and might conflict with efficiency in the firm
(Buchanan, 1972, as cited by Odipo, 2012). Public choice theory describes the government acting
as politicians and bureaucrats who may use the state ownership for political reasons. The theory
goes ahead to state that the government as well as the state actors will act in certain ways in weak
institutional settings where the public does not have good access so as to demand good
performance from them or in less developed countries.
Due to the fact that more focus is on performance under this theory, predictions herein are that
entities with high levels of government shareholding are low performers because politicians
impose objectives on these firms majorly meant to help them gain votes but might conflict with
efficiency of the said firms. According to Shleifer & Vishny (1994) the cost of monitoring this

18. 9
behavior offsets the benefits from the general public viewpoint hence giving up of ownership by
the state in the firms is expected to cause a change in the goals of the firm and in the bargaining
power of different actions in the political market hence increasing efficiency leading to better
financial performance.
2.2.3 Expectation Theory
Citing from Haskel and Szymansks (1999), Mwangi (2014) argue that following reduction of
government shareholding on firms, the public places a lot of expectation on future of the firm.
This expectation theory covers areas of efficiency and productivity of the firm. Empirical
evidence however does not pinpoint how much the government should transfer to private hands
so as to have maximum allocation and achieve productive efficiency (Qi, Wu & Zhang, 1999;
Tian & Estrin, 2007 as cited by Odipo, 2012).
2.2.4 Objective Based Theory.
Ownership might affect incentives through objectives conveyed to managers by owners. The
ministers responsible for state owned firms are particularly interested in how various decisions
affect the societal welfare. Shapiro and Willig (1995) argue that managers of SOE are given an
objective that gives weight to private and welfare objectives. With increased government
shareholding there may be a possible shift from the objective of profit maximization since
government ensures that the firms obtain profits they consider fair and reasonable. Firms with
government shareholding may therefore be influenced to pursue the objectives of societal welfare.
In general, these objective based theories suggest that less government shareholding insulates
management from political and social goals, which causes the new owners to focus on financial
objectives and redirect incentives to enhance financial performance. Mabel Birungi Komunda

19. 10
referring from Laffont and Tirole, (1991); Hart, (2003); Szentpeteri, (2006); Roland, (2008)
points that managers of state owned enterprises pursue objectives that vary from those of non-
state owned companies and thus are subject to limited monitoring. Martin K Odipo referring
from Kornai, Maskin and Roland (2003), argue that state owned enterprises are faced with
relatively low bankruptcy threat since the government bails out these firms in times of financial
distress.
2.2.5 Agency Theory
This theory mainly focuses on the relationship that exists between shareholders and the
management of the company. The parties in this theory include the shareholders, who are the
principals and the management who serve as the agents to the principals. According to Jensen and
Meckling (1976), managers in public traded firms are assumed to maximize their own utility
rather than that of the owners. To this effect, the theory seeks to address the issues that come in
when the interests and the desires of the agents and the principals are in conflict and at the same
time, due to difficulties and cost problems, the principal is unable to ascertain what the agent is
doing.
Another issue that comes to play is the difference in the attitude towards risk by both parties due
to the difference in risk tolerances. In firms with lesser government shareholding the divergence
brought about by the fact that managers are thought to maximize their own utility rather than that
of the owners is reduced through external mechanisms such as markets for managers, capital and
corporate controls including internal mechanisms such as managerial participation in ownerships,
the board of directors and reward systems. However, as government shareholding increases,
corporate controls are influenced by politics making it difficult to solve the agency problem.

20. 11
Large shareholders who gain effective control of a firm’s management have a greater incentive to
pursue their own interests and in most cases these are not the interests of those who have invested
in the firm.
2.2.6 Signaling Theory
The proportion of government ownership in a firm’s total share ownership has an effect on the
investor’s perceptions of the firms’ value according to literature on privatization through initial
public offerings. By this, a one-time sale of a large proportion of shares or even the full amount of
shares to the public indicates that the government is committed to the privatization and no amount
of re-nationalization is likely. This in effect shows a positive relation between the proportion of
shares sold by the government and the initial excess return of initial public offerings as the market
welcomes such commitment.
According to Certo (2001) and Pyle (1997), the effect of ownership structure on firm’s value and
the association between a firm value and financial decisions has been explained by the signaling
theory. In traditional economies however, where the state ownership is prevalent, debt is
unfavorably perceived by investors because the external monitoring system is underdeveloped
and the internal corporate governance is generally weak (Baer & Gray, 1995; Dharwadkar et al,
2000 as cited by Le & Chizema, 2011).
Public ownership can give two contradictory signals about the company’s value; on one hand, the
gain of the investor’s confidence through connecting the business with the government in terms of
financial resources’ accessibility and the institutional knowledge.

21. 12
2.3 Empirical Review
A study conducted by Gursoy and Aydogan (2000) on Turkish Market which sought to establish
the impact of government ownership structure of the Turkish non-financial companies listed on
the Istanbul Stock Exchange (ISE) on financial performance. In the study, two groups of
variables were used. The scholars used accounting-based variables and market based variables
for measuring financial performance of the firms. The accounting measures used are return on
equity (ROE) and return on assets (ROA) while the market based variables used by the scholars
were Price-to-earnings (PE) and stock returns (RET). The scholars used various independent
variables to predict the relationship of these variables and financial performance of firms. The
independent variables for their study included size, leverage and shareholder’s control. Based on
the results of regression analysis, the scholars showed that there a negative relationship between
government ownership and company performance based on (ROA and ROE) after controlling
leverage and size.
Studies by Alfaraih, Alanezi & Almujamed (2012), found out that government ownership has
negative influence on the performance of Kuwait firms. The scholars observed a negative impact
on Kuwait firm’s performance as a result of government ownership. The scholars used a sample
of 134 firms listed in the Kuwait Stock Exchange using Tobin Q and ROA as the financial
performance measure. Tobin Q was computed as the ratio of the market capitalization plus the
total debt divided by the total firm assets. The scholars used other independent variables such as
board size, role duality, dividend policy, leverage, audit quality and industry to capture other
influences on firm financial performance. Two multivariate regression analysis models were
used for the study for each dependent variable (ROA and Tobin Q). In both regression analysis

22. 13
results of the models used, government ownership was negatively related with financial
performance.
Kumar (2003) compared the financial performance of state owned, private owned, and mixed
state-private ownership companies in India from 1973 to 1989 (Ab Razak, Ahmad & Aliahmed,
2008). The findings suggested that the most profitable companies were the private owned
followed by mixed ownership while state owned enterprises had the worst performance. A
majority of other studies in India and abroad draw similar conclusions (Shleifer and Vishny,
1997; Shleifer, 1998). Similarly Orden and Garmendia (2005) examined the relationship between
government ownership structure and financial performance in Spanish companies. Company
performances measures which the scholars used in the research were return on assets (ROA) and
return on equity (ROE). One of hypotheses findings was that companies under control of
government showed negative impact and had worse performance that other ownership structures.
Empirical studies done in China by Tian and Estrin (2008) found that government ownership
reduce corporate value due to political interference. Also in other paper done by (Hu, Song &
Zhang, 2004), the scholars found that government enterprise performs worse in profitability than
non-government enterprises. Zeitun and Tian (2007) examined the impact of ownership structure
mix on Company’s performance using a sample of 59 publicly listed companies in Jordan
between 1989 and 2002. They documented that the ownership structure has significant impact on
performance based on accounting measure. However, government involvement is significantly
negative related to the company’s performance based on ROA and ROE (return on equity). This
negative impact on financial performance has been attributed to excessive bureaucracy,

23. 14
tribalism, nepotism, political expediencies, corruption and lack of respect for laws and
regulations of the country. Empirical studies done in China by Tian and Estrin (2008) found that
government ownership reduce corporate value due to political interference. The researchers
looked at a large set of Chinese public listed companies during the period 1994 to 2004. They
used a descriptive research design to come up with U- shaped relationship between government
shareholding and corporate performance. The paper contributes to the under covered areas of
literature concerning this topic. The researchers use econometric methods and questions of
indigeneity in their analysis. Similarly, in another paper done by (Hu, Song & Zhang, 2004), the
scholars found that government enterprise performs worse in profitability than non-government
enterprises.
More recently, Zeitun and Tian (2007) examined the impact of ownership structure mix on
Company’s performance using a sample of 59 publicly listed companies in Jordan between 1989
and 2002. They documented that the ownership structure has significant impact on performance
based on accounting measures like ROA and ROE (return on equity). However, Tobin’s Q
analysis by this scholars show a positive relationship of government ownership and market
performance.
State ownership may have a positive effect on firm performance. Borisova et al. (2012) argue
that state ownership has plenty of advantages, such as resources and power, compared to other
types of ownership. For example, government may raise fund easily, can establish regulations
that impact firms, and has informational advantage. Thus, firms with state ownership may have
better performance compared to other firms. In addition, Kang (2012) find that Chinese marketed

24. 15
state owned firms improve firm performance. This result reveals that state ownership in listed
firms may play an active role in emerging market.
In Kenya, studies by Odipo (2010) present contradictory results. The study which took a sample
of 16 firms with government shareholding listed in the NSE showed insignificant relationship
between government shareholding and financial performance of firms using ROA as the
performance measure. Out of the 16 firms chosen for the study, 7 percent were deemed to be
controlled by the government (above 50 percent share ownership) while the rest were considered
as government investments. Descriptive, univariate and multivariate data analysis were
performed using SPSS. Based on various non-parametric tests, the study found no significant
differences in financial performance between firms controlled by government and those that
were regarded as government investments.
Another study by Birya, (2009) on the effects of government ownership on financial
performance of commercial banks in Kenya showed a negative relationship. The study employed
descriptive event census design on a population of commercial banks that previously had
relatively high levels of government ownership quoted at NSE. The study used secondary data in
collecting information. These sources include internet, periodic reports and brochures on key
variables like sales, profit before tax, total assets, current assets, total liabilities and current
liabilities for a period of two years before and two years after government had shed off majority
of its share for each bank. The data was analyzed for variation using the student t-test, to test the
hypothesis on whether there is any significance difference in financial performance after partial
privatization. The study found that partial privatization has a positive impact on the banks'

25. 16
financial performance as it increased the banks' profitability ratios, That is, the banks get a lot of
profits for every shilling invested in assets. In addition, after partial privatization, the banks faces
more pressure to perform as they are not cushioned by the government hence have to perform to
survive.
2.4 Chapter Summary
Both theoretical and empirical evidence does not lead us to a unified the relationship between
ownership structure and firm performance as some evidence show positive others negative.

26. 17
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Introduction
This chapter outlines our method of carrying the study and therefore the various issues discussed
are: the research design, population of study, data collection, and data analysis methods.
3.2 Research Design
In this research we adopted quantitative research design and a causal study methodology. Causal
study falls under the conclusive research category of study and it explains the cause and effect
relationship between variables. In this case, a causal effect relationship between government
ownership and financial performance of firms will be explored. Government shareholding size
will serve as our independent variable while financial performance will be our dependent variable.
Surveys of a limited number of firms listed at the NSE will be used to facilitate collection of huge
amounts of data economically. Generally, quantitative data will be collected from the research in
order to explain the effect of the proportion of shareholding on the financial performance.
3.2 Population of the Study
The population of study consists of firms with government shareholding, listed in the Nairobi
Securities Exchange. We used census. Our analysis will focus on the period between 2010 to
2014. This period reflect the most recent data and hence makes our study very relevant.
3.3 Data Collection
We used secondary data from the published annual reports of quoted companies for the period
2010 to 2014.These reports give us the data for the various variables we have used in our study.
The published annual reports were obtained from the NSE library and Capital Markets Authority
resource center.

27. 18
3.4 Data Analysis
Data analysis is the application of reasoning to understand the data that has been gathered.
Multiple regression analysis was used to investigate the effect of government shareholding on
performance of firms listed at the NSE by use of Statistical Package for Social Sciences (SPSS)
The regression model is;
Perf (ROA) =α+β1GOV_SHAREHOLDING+β2 SIZE+β3GWT+β4POI+β5LIQ+Ɛ,
The dependent variable is performance of government owned firms, measured by ROA. ROA is a
measure of financial performance using an average of five years. α is a constant term that
represents the value of the dependent variable, ROA, when all the independent variables are
assumed to be zero (y intercept)
β1, β2, β3, β4 and β5 are correlation coefficients that represent the effect of a unit change in the
independent variables on the dependent variable, ROA.
GOV_SHAREHOLDING is the independent variable used in the analysis.
COMPANY SIZE, GROWTH, PROPORTION OF INSTITUTIONAL INVESTORS and
LIQUIDITY are the control variables we used in our analysis.
Ɛ is the error term which shows the amount of change in the dependent variable, ROA, which
cannot be accounted for by changes in independent variables.

28. 19
These are defined in Table 3.1
The data is defined and organized in Table 4.0. for the population of 12 firms that we have used.
This study has used descriptive statistics. That is; mean, maximum, minimum and standard
deviation values to show the characteristics of these 12 firms. To determine the effect of this type
of ownership structure, on a firm’s performance, the regression output is interpreted using R2
.
F statistic and t statistic are used to evaluate statistical significance of the individual parameters.
The regression is done for the dependent variable (ROA). The same interpretations are made for
the effect of government shareholding on firms’ financial performance.

29. 20
Table 1: Definition of Variables
VARIABLE ABBREVIATION MEASURES
Dependent Variable
Return on Assets ROA Net Income/ Total assets.
Independent Variable
Government Shareholding Size GOV_SHAREHOLDING Shares owned by Government in
proportion to total shares of the firm.
Control Variables
Size SIZE Total Assets (natural log)
Proportion of institutional Investors POI Percentage of institutional investors to
total investors
Liquidity LIQ Current assets/current liabilities
Firms growth GRT Average annual growth per year

30. 21
CHAPTER FOUR:
DATA ANALYSIS, RESULTS AND DISCUSSIONS
4.0 Introduction
This chapter presents data analysis, results and discussion. The chapter discusses descriptive
statistics, correlation analysis, and regression analysis.
4.1 Data Collection and Analysis
This study sought to determine the effect of government shareholding on financial performance of
all firms with government shareholding, listed in the Nairobi Securities Exchange. The total
number of these firms with government shareholding and listed in NSE were 12. The study’s
independent variable was the size of government shareholding in the company, calculated as the
government-owned shares over total shares.
The financial performance of these firms was measured using return on assets (ROA) which was
calculated as an average of individual firm’s ROA for the last 5 years. The study control variables
included; firm size, firm growth, proportion of institutional investors and liquidity.

31. 22
4.2 Descriptive Statistics
Table 2: Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
ROA 12.00 -0.04 0.17 0.05 0.06
GOV_SHAREHOLDING 12.00 0.01 0.70 0.28 0.23
SIZE(natural log total assets) 12.00 2.753 5.932 4.47 0.97
GROWTH 12.00 0.11 1.74 0.65 0.49
PRP OF INST INVESTORS 12.00 0.03 0.94 0.41 0.30
LIQUIDITY 12.00 0.32 2.09 1.08 0.56
Table 4.1 presents descriptive statistics with minimum and maximum values for every variable,
their mean and standard deviations. Government shareholding in most of the companies is 28% as
shown by the mean=0.28. The minimum and maximum shareholding is 1% and 70% with
standard deviation of 0.23.
Size as measured by natural log has the highest of 5.932, lowest of 2.753 and a mean of 4.47 with
a standard deviation of 0.97.
Average growth of these firms was 65% as indicated by mean=0.65 and standard deviation of
0.49. Firm with the highest growth as presented in the descriptive statistics was 174% against
11% with minimum growth. Proportion of institutional investors indicated that, averagely the
proportion is 41% with standard deviation of 0.3.
Majority off these firms are liquid as indicated by mean = 1.08 with standard deviation of 0.56.

32. 23
4.3 Correlation Analysis
A partial correlation analysis using Karl Pearson correlation coefficient was performed. A
negative coefficient indicated a negative relationship between the variables correlated; in which
case an increase in one variable would result into a decrease in the other variable and vice versa.
A positive coefficient on the other hand indicates a positive relationship in the variables; meaning
that changes in the variables move together. An increase in one variable would therefore result
into an increase in the other variable and vice versa.
The results of correlation analysis were judged based on the strength of relationship between the
correlated variables and whether or not the correlation coefficient was negative or positive.
Interpretations were made based on the following scale.
-1 Perfect negative relationship between the variables
-0.10 Almost no relationship
0 No relationship between the variables
0.02-0.09 Very weak relationship
0.10-0.29 Weak relationship
0.30-0.49 Moderately weak relationship
0.50 Moderate relationships
0.50-0.60 Moderately strong relationship
0.70-0.89 Strong relationship
0.98-0.98 Very strong relationship
0.99 Almost perfect relationship
+1 Perfect positive relationship between the variables

33. 24
Table 3: Correlation Analysis
ROA
GOV_SHARE
HOLDING SIZE GROWTH
PRP OF INST
INVESTORS
LIQUIDI
TY
ROA Pearson Correlation
Sig. (2-tailed)
N
GOV_SHAREH
OLDING
Pearson Correlation -.428**
Sig. (2-tailed) .007
N 12
SIZE(total assets
in billions)
Pearson Correlation -.214 .234
Sig. (2-tailed) .504 .465
N 12 12
GROWTH Pearson Correlation .309 .331 .155
Sig. (2-tailed) .329 .293 .631
N 12 12 12
PRP OF INST
INVESTORS
Pearson Correlation .156 -.619*
-.489 -.231
Sig. (2-tailed) .628 .032 .107 .470
N 12 12 12 12
LIQUIDITY Pearson Correlation .026 .585*
.174 -.172 -.396
Sig. (2-tailed) .936 .046 .589 .594 .203
N 12 12 12 12 12
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

34. 25

35. 27
The government shareholding has a negative correlation with proportion of institution investors as
indicated by the correlation coefficient of -0.619. All these variables are significant at p<0.05.
Government shareholding is however positively correlated with liquidity with a correlation
coefficient of 0.585.
There is a negative correlation between government shareholding and ROA with a correlation
coefficient of -0.428. This is significant at p<0.05
There is negative relationship between size and ROA with a correlation coefficient -0.214 which
is insignificant at p<0.05. Institutional investors and growth have a weak positive relationship
with ROA with correlation coefficient of 0.156 and 0.309.
4.4 Regression Analysis
To determine the effect of government ownership on financial performance of all firms with
government shareholding, listed in the Nairobi Securities Exchange, multiple regression analysis
was undertaken. The dependent variable was the financial performance as measured by ROA
against the independent variable and control variables which included; government shareholding
in the company, calculated as the government-owned shares over total shares; firm size, growth,
proportion of institutional investors and liquidity.

36. 28
4.4.1 Summary of Regression Model
Table 4: Summary of Regression Model
Model R R Square
Adjusted
R Square
Std. Error of the
Estimate
1 .543a .295 .579 .07637
a. Predictors: (Constant), LIQUIDITY, GROWTH, PRP OF INST INVESTORS, SIZE(total
assets in billions), GOV_SHAREHOLDING
Table 4.3 presents summary of regression model result. The value of R and R2
are 0.543 and
0.295 respectively. The R value of 0.543 represents the correlation between financial performance
and government ownership determinants (predictor variables). The adjusted R2
which indicates
the explanatory power of the independent variables is 0.579. This means that 57.9% of the
variation in financial performance (ROA) is explained by the independent variables. The adjusted
R2
value as revealed by the result is high which means that over 57.9% of the variation in the
dependent variable is explained by the model, denoting a strong relationship between the
explanatory variable and ROA with only 42.1% which is not explained by the model.
The standard error of the estimate is 7.63%, which explains the variability of the actual ROA
from the predicted ROA values in the future.

37. 29
4.4.2 Analysis of Variance in Regression Analysis
Table 5: Summary of Anova
Model Sum of Squares Df Mean Square F Sig.
1 Regression .009 7 .001 .453 .007b
Residual .032 4 .008
Total .042 11
a. Dependent Variable: ROA
b. Predictors: (Constant), LIQUIDITY, GROWTH, PRP OF INST INVESTORS, SIZE(total assets in
billions), GOV_SHAREHOLDING
Table 4.4 shows results of analysis of variance which explains if the regression model as
measured by F-ration is significant. These results indicate that the model had an f-ratio of 0.453
which was significant at p <0.05. This result indicates that there is significant evidence to infer
that at least one of the explanatory variables is linearly related to ROA.

38. 30
4.4.3 Summary of Coefficients of Regression Model
Table 6: Summary of Coefficients of Regression Model
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) -.028 .141 .198 .033
GOV_SHAREHOLDING -.048 .388 .175 .123 .008
SIZE(total assets in
billions)
-5.57 .000 -.100 -.165 .877
GROWTH .047 .073 .379 .651 .550
PRP OF INST
INVESTORS
.055 .148 .275 .375 .009
LIQUIDITY .008 .080 .072 .098 .926
Table 4.5 presents the test of the statistical significance of the independent variables in the model.
This provides the estimates of independent variables, their standard error and the t-ratios. The
table also provides the statistical significance of each independent variable in the regression
model.
The regression model for this study was
ROA =α+β1GOV_SHAREHOLDING+β2 SIZE+β3GWT+β4POI+β5LIQ+Ɛ
Where α is the constant, β1, β2, β3, β4 and β5 are correlation coefficients that represent the effect
of a unit change in the independent variables on the dependent variable, ROA. The results
indicate that the t-ratio for value of the constant is 0.198 with p value=0.033 which is significant
at p<0.05.
Government shareholding had a t-value of 0.123 with p value of 0.008 which is significant at
P<0.05. This indicates that value of government shareholding is significant predictor of
profitability of these firms. The estimate of coefficient of the government shareholding is -0.48
which indicates that value of government shareholding is negatively related to profitability.

39. 31
The proportion of institutional investors had a coefficient estimate of .055 which indicates that it
had a positive relationship with profitability. This indicates that value of proportion of
institutional investors is a significant predictor of profitability of firms with government
shareholding.
The control variables namely the total asset base, growth and liquidity showed an insignificant
relationship. The coefficient estimates of these variables respectively were; -5.57, 0.047, 0.008.
The t values were -0.165, 0.651 and 0.098 respectively, all insignificant at p value 0.05. This
indicates that all these control variables have insignificant effect on performance of firms with
government shareholding.
The regression model becomes
ROA= -0.28+-0.48GOV_SHAREHOLDING+-5.57SIZE+0.047GWT+0.055POI+0.008+ Ɛ
However based on significant variables, the regression model becomes;
ROA = -0.28+-0.48GOV_SHAREHOLDING +0.55POI+Ɛ

40. 32
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Introduction
This chapter presents summary, conclusion and recommendations based on data analysis. The
study sought to determine the effect of government shareholding on financial performance of all
firms with government shareholding, listed in the Nairobi Securities Exchange.
5.1 Summary
The study used a combination of descriptive and multivariate analysis. Majority off these firms
are liquid as shown by mean = 1.08.
Correlation analysis established that that government shareholding is negatively correlated with
ROA. The government shareholding however has a strong and negative correlation with
proportion of institution investors, all the variables significant at p<0.05.
Regression analysis identified that there are some variables which are significant. The model
fitness determined by the analysis of variance indicated that f-test was significant at p<0.05.
Hence we reject the null hypothesis that Government ownership has no effect on firm’s financial
performance.
5.2 Conclusion
Based on regression analysis and the model provided as the test to determine the effect of
government shareholding on performance, the study concludes that there are is a significant
negative effect on financial performance. The control variables have various effects on financial

41. 33
performance. The proportion of institutional investors has a significant positive effect on firm’s
financial performance, while the other variables have insignificant effect on firm’s performance.
This study adds to the body of knowledge that supports that government shareholding has a
negative effect on financial performance of firms with government ownership listed in the NSE.
5.3 Recommendations
From the study results, it’s recommended that the government doesn’t necessarily need to shed
off all its shareholding but it can relinquish some of its shareholdings especially where it owns a
lot of shares. This will signal to the investors that the government is in support of privatization
which in turn encourages local and foreign investment.
Our recommendation relates to the signaling theory discussed in the theoretical reviews of
literature. According to the theory, a reduction in the level of government shareholding provides
information to the market that the government is dedicated to improve the performance of firms in
which it majorly owns shares.
5.4 Limitations to the study
One of the major limitations of this study is that the number of companies in which government
owns shares are very small. This reflects the growing trend of government to sell off its shares in
most companies in which it used to have shares. Therefore, it is difficult to generalize the results
of this study because the sample size used is relatively small.
Secondly there were some instances in which the shareholding of the government changed yet the
present study did not analyze the effect of this change and only used the current shareholding as at
2014.

42. 34
Thirdly, our study mainly focused on firms in different sectors whose financial performance
sensitivities to the level of government shareholding differ.
Finally some firms with government shareholding have inconsistent data, due to delisting and
delisting. Due to this we had to ignore these firms and thus difficulties in generalizing our study
findings to all the firms that the government owns shares.
5.5 Suggestions for further Research
There is need for future studies to use other control variables, other than the factors we have used,
which might influence financial performance of firms in which government has some
shareholding in.
This study can be replicated with the inclusion of other firms in which government does not hold
any shares in determine whether there are significant differences in firms in which the
government has some shareholding and those that the government does not have any shareholding
in.
In addition, a similar study can be directed to a specific sector such as banking sector and not all
industries.
A similar study can be done to determine the effect of government shareholding on financial
performance of all firms and not the only ones listed in NSE.

43. 35
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47. 39
APPENDICES
Appendix I: List of Companies with government shareholding listed at the Nairobi
Securities Exchange
COMMERCIAL AND SERVICES
Kenya Airways Ltd
CONSTRUCTION AND ALLIED
E.A.Portland Cement Ltd
BANKING
CFC Stanbic Holdings Ltd
Housing Finance Co Ltd
Kenya Commercial Bank Ltd
National Bank of Kenya Ltd
ENERGY AND PETROLEUM
KenGen Ltd
Kenya Power & Lighting Co Ltd
INSURANCE
Kenya Re-Insurance Corporation Ltd
Liberty Kenya Holdings Ltd

48. 40
MANUFACTURING AND ALLIED
Mumias Sugar Co. Ltd
TELECOMMUNICATION AND TECHNOLOGY
Safaricom Ltd

49. 41
Appendix 2 : Raw Data
COMPANY ROA GOV_SHARE
HOLDING
SIZE
(natural log
of total
assets)
GROWTH PRP OF INST
INVESTORS
LIQUIDITY
Kengen
0.0182 0.700 5.522 0.6618 0.034 2.091
Kplc
0.0383 0.501 5.394 1.7440 0.3626 1.032
Kenya
Commercial
Bank Ltd
0.0356 0.177 5.932 0.4997 0.039 1.196
National
Bank 0.0122 0.225 4.811 0.1047 0.5013 0.357
C.F.C. Stanbic
Bank 0.0181 0.011 5.049 0.292 0.7896 0.478
Housing
Finance 0.166 0.036 4.041 1.279 0.5788 0.320
Mumias
Sugar -0.0387 0.200 3.243 0.394 0.0707 1.340
Safaricom
0.126 0.350 4.902 0.293 0.4481 1.881
E.A. Portland
Cement 0.046 0.253 2.753 0.305 0.7295 1.224
Kenya Airways
0.0121 0.298 5.002 1.029 0.2673 0.6
Kenya Re
0.1446 0.600 3.475 0.873 0.2099 1.2
Liberty Kenya
0.0352 0.008 3.459 0.34 0.9396 1.2