THE EFFECTS OF DIVERSIFICATION ON GROWTH OF
COMPANIES LISTED IN THE NAIROBI SECURITIES EXCHANGE
BY
KARIUKI SIMON NJUGUNA
D61/75273/2009
RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF
THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION,
UNIVERSITY OF NAIROBI.
NOVEMBER 2013
Declaration
I declare that this project is my original work and has never been presented for academic
purposes in any other university.
Signed……………………………..
Date……………………..
KARIUKI SIMON NJUGUNA
D61/75273/2009
This Research Project has been submitted for examination with my approval as the university
supervisor.
MR HERICK ONDIGO
Lecturer: Department of Finance and Accounting
School of Business
University of Nairobi.
Signed……………………………..
Date……………………..
i
Acknowledgements
I wish to appreciate the contributions of my parents, Mr. and Mrs. Michael Kariuki, for their
immense contribution and sacrifices on my education, my supervisor, Mr. Herick Ondigo for
his guidance, encouragement and prompt responses throughout the period of this study and
the entire University of Nairobi fraternity who during tenure at the institution made my
education a success. Family, friends and colleagues, too many to mention here, who
encouraged and supported me during this study. Thank you all.
ii
Dedication
I wish to dedicate this project to this project to all the people who made it possible for me to
achieve my academic dreams and especially to my parents Mr.Michael Kariuki and my late
Mum Teresia Njambi for their immense contribution towards my education.
iii
Abstract
In finance, diversification means reducing risk by investing in a variety of assets. If the asset
values do not move up and down in perfect synchrony, a diversified portfolio will have less
risk than the weighted average risk of its constituent assets, and often less risk than the least
risky of its constituents. The concept behind this study was that firms tend to diversify so as to
enhance growth and their value to be increased. This can be supported by theories discussed in
the study and those gives evidence and predict outcomes of diversification on growth of
companies although in a different environment. Greenley (1989) wrote that growth can be
achieved in a number of ways such as internal resources and personnel development, external
acquisition, merger, joint venture and other strategic alliances. Financial growth can also be
achieved by improving efficiency, financial control and increasing turnover.
This study intended to establish the effects of diversification on growth of listed companies in
the Nairobi Securities Exchange. Specifically, the paper studies the relationship diversification
on the growth of listed companies in the Nairobi Securities Exchange. To achieve this aim a
census of companies listed in the Nairobi Security Exchange was done using, a model that
incorporated measure of growth being the dependent variable and measures of diversification
being the independent variables was formulated and regression analysis was carried to come
up with the results.
The results of the findings was that R squared was consistent with the agency theory and
showed that companies had positive relationship between the growth and firms size, the
relationship variables was also not very strong, and this provided evidence to the policy that
there are other factors that affect the growth of the companies other than diversification. This
also cannot be a valid conclusion to deter firms from diversifying since by doing so they also
end up reducing risk that might face them in future.
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TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION ............................................................................. 1
1.1 Background of the Study ............................................................................................... 1
1.1.1 Diversification .......................................................................................................... 1
1.1.2 Growth ...................................................................................................................... 3
1.1.3 Effects of Diversification on Growth ........................................................................ 4
1.1.4 Nairobi Security Exchange ...................................................................................... 5
1.2 Research Problem .......................................................................................................... 6
1.3 Research Objective ........................................................................................................ 8
1.4 Value of the Study .......................................................................................................... 8
CHAPTER TWO: LITERATURE REVIEW............................................................. 9
2.1 Introduction. .................................................................................................................... 9
2.2 Theoretical Review. ....................................................................................................... 9
2.2.1 Resource View Theory. ........................................................................................... 10
2.2.2 Agency Theory. ....................................................................................................... 11
2.2.3 Market View Theory. ............................................................................................. 12
2.3 Types of Diversification. ............................................................................................... 13
2.3.1 Concentric Diversification. .................................................................................... 13
2.3.2 Conglomerate Diversification ................................................................................ 13
2.3.3 Internal Diversification. ........................................................................................ 14
2.3.4 External Diversification. ........................................................................................ 15
2.4 Measures of Growth ..................................................................................................... 15
2.5. Empirical Review........................................................................................................ 17
2.6 Summary of Literatture Review ................................................................................... 24
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CHAPTER THREE: RESEARCH METHODOLOGY .......................................... 25
3.1 Introduction ................................................................................................................... 25
3.2 Researchs Design ......................................................................................................... 25
3.3 Population..................................................................................................................... 25
3.4 Data Collection ............................................................................................................. 25
3.5 Data Analysis. ............................................................................................................... 26
3.5.1 Analytical Model. ................................................................................................... 26
CHAPTER FOUR: DATA ANALYSIS,RESULTS AND DISCUSSIONS....... 27
4.1 Introduction .................................................................................................................... 27
4.2 Descriptive Statistics ....................................................................................................... 27
4.3 Regression Analyisis ...................................................................................................... 27
4.4 Interpretation of Findings ............................................................................................... 29
CHAPTER FIVE: SUMMARY,CONCLUSION AND
RECOMMENDATIONS .................................................................................................... 31
5.1 Introduction ...................................................................................................................... 31
5.2 Summary ........................................................................................................................... 31
5.3 Conclusion........................................................................................................................ 32
5.4 Recommendations for Policy ........................................................................................... 32
5.5 Limitations of the Study .................................................................................................... 32
5.6 Areas for Further Research ............................................................................................... 32
REFERENCES ............................................................................................................................. 33
Appendicies…............................................................................................................................... 35
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List of Abbreviations
ATS= Automated trading System
CDS= Central Depository System
EABS= East Africa Building Society
FISD= Financial Information Services Division
NASI= NSE All Share Index
NSE= Nairobi Securities Exchange
ROE=Return On Equity
REITS= Real Estate Investments Trusts
SIIA= Software and Information Industry Association
SPSS= Statistical Package for the Social Sciences
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List of Tables
4.1 Overall descriptive statics ................................................................................................. 27
4.2 Regression Analyisis .......................................................................................................... 28
4.3 Model Summary ................................................................................................................ 28
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CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
This study will assess how the diversification strategy impacts on firm value and provide
evidence how the diversification affects the value of the firm, Specifically, the study focuses
on the effect of different types of diversification on growth of firms listed in the NSE.
Diversification is mentioned in the Bible, in the book of Ecclesiastes which was written in
approximately 935. “But divide your investments among many places, for you do not know
what risks might lay ahead.” Diversification is also mentioned in the Talmud. The formula
given there is to split one's assets into thirds: one third in businesses (buying and selling
things), one third kept liquid (e.g. gold coins), and one third in land (real estate).
Diversification is mentioned in Shakespeare (Merchant of Venice): My ventures are not in
one bottom trusted, Nor to one place; nor is my whole estate. Upon the fortune of this present
year: Therefore, my merchandise makes me not sad. The modern understanding of
diversification dates back to the work of Harry Markowitz in the 1950s. A risk management
technique that mixes a wide variety of investments within a portfolio, the rationale behind
this technique contends that a portfolio of different kinds of investments will, on average,
yield higher returns and pose a lower risk than any individual investment found within the
portfolio.
The diversification strategy is a considerable and interesting topic of study in the
literature of firm valuation, but there is significant divergence on whether or not
diversification creates long-run competitive advantage and growth (Markides and
1
Williamson, 1994). Nowadays, there is a debate in the strategic management literature about
the role played by corporate diversification as a value maximization strategy for shareholders. A
firm diversifies when the benefits of diversification overcome its costs, and it stays focused
when the opposite occurs. On the one hand, some theoretical arguments point to diversification as
a value-increasing strategy for the firm.
1.1.1 Diversification
In finance, diversification means reducing risk by investing in a variety of assets. If the asset
values do not move up and down in perfect synchrony, a diversified portfolio will have less
risk than the weighted average risk of its constituent assets, and often less risk than the least
risky of its constituents. Therefore, any risk-averse investor will diversify to at least some
extent, with more risk-averse investors diversifying more completely than less risk-averse
investors.
A diversified firm can be considered as one having operations in more than a single
industry. Some scholars believe that these operations must be in synergy for
diversification to be meaningful. Ofori and Chan (2000) identified diversification as one of
three business growth paths (apart from concentration and acquisition). Diversification is
defined by Pearce and Robinson (2000) as a firm‟s distinct departure from existing
operations through acquisition or internal establishment of separate business that are able to
provide synergy with the original firm by counter-balancing strengths and weaknesses of the
two businesses.
2
1.1.2 Growth
Greenley (1989) wrote that growth can be achieved in a number of ways such as internal
resources and personnel development, external acquisition, merger, joint venture and
other strategic alliances. Financial growth can also be achieved by improving efficiency,
financial control and increasing turnover. Firms usually look into other areas of activity in
the value chain in order to enhance their growth.
Firm‟s growth could be measured on the basis of assets, corporate turnover, share prices,
sales revenue, volume of output, and share of market, profit, number of employee and
branches and extent of geographical spread.
Financial statements on their own are of limited use, they need to be interpreted in order
to gain additional information from them. There are variety of ratios that could be
calculated, depending on the need of the user of such information. In the interpretation of
financial ratios, the following group of ratios could be calculated; profitability ratios;
liquidity ratios; long term financial stability ratios and investor ratios. These measures
have been employed by researchers such as Akintoye and Skitmore (1991) and Ibrahim
and Kaka (2007), among others to measure firm‟s growth.
1.1.3 Effects of Diversification on Growth
The basic purpose of diversification is to minimize risk as by spreading your capital amongst
a variety of investments one is less likely to be seriously adversely effected by a sharp and
unanticipated move in one or a few of the holdings. However, even though diversification has
3
become a very common practice there are still a number of misconceptions and problems
relating to its use among proponents of both traditional investment techniques (i.e.
fundamental analysis) and those on the technical analysis side Ramanujan and Varadarajan
(1989). Diversification has created complacency as many investors do not look past any ideas
that differ to what they believe to be the one and only sound investment method; extensive
diversification across a large number of markets in a net long manner. However, this
complacency which is widespread throughout the money management industry has resulted
in returns that in the long-term are on average no better than the overall returns of the broad
market.Diversification is the riskiest of the four strategies presented in the Ansoff (1965)
matrix and requires the most careful investigation. Going into an unknown market with an
unfamiliar product offering means a lack of experience in the new skills and techniques
required.
Therefore, the company puts itself in a great uncertainty. Moreover, diversification might
necessitate significant expanding of human and financial resources, which may detract focus,
commitment, and sustained investments in the core industries. Therefore, a firm should
choose this option only when the current product or current market orientation does not offer
further opportunities for growth. In order to measure the chances of success, different tests
can be done; the attractiveness test: the industry that has been chosen has to be either
attractive or capable of being made attractive, the cost-of-entry test: the cost of entry must not
capitalize all future profits; the better-off test: the new unit must either gain competitive
advantage from its link with the corporation or vice versa. Because of the high risks
explained above, many companies attempting to diversify have led to failure Rosa (1998)
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1.1.4 Nairobi Securities Exchange
In Kenya, dealing in shares and stocks started in the 1920's when the country was still a
British colony. However the market was not formal as there did not exist any rules and
regulations to govern stock broking activities. In 1954 the Nairobi Stock Exchange was then
constituted as a voluntary association of stockbrokers registered under the Societies Act. .
The East African Securities Exchanges Association came into being in 2004, following the
signing of a Memorandum of Understanding between the Dar-es-Salaam Stock Exchange, the
Uganda Securities Exchange and the Nairobi Stock Exchange.
In July 2011, the Nairobi Stock Exchange Limited, changed its name to the Nairobi Securities
Exchange Limited. The change of name reflected the strategic plan of the Nairobi Securities
Exchange to evolve into a full service securities exchange which supports trading, clearing
and settlement of equities, debt, derivatives and other associated instruments. In the same
year, the equity settlement cycle moved from the previous T+4 settlement cycle to the T+3
settlement cycle. As of March 2012, the Nairobi Securities Exchange became a member of
the Financial Information Services Division (FISD) of the Software and Information Industry
Association (SIIA).
1.2 Research Problem
Firms have to continually review their strategic operations in order to cope with the changing
environment and enhance growth and at the same time continue being competitive. Entrants in
the industries are posing a great threat to the existing firms and it is becoming almost
inevitable to resist diversification as a tool to curb this threat and at the same time strengthen
their core business and increase their revenue and result in growth of the firms.
5
With amendments of the Act in 1995 making it possible for foreign portfolio investors to buy
government securities; repealing of the Exchange Control Act in December 1995 which
ensured the removal of all exchange controls; introduction of Central Depository System
(CDS) in November 2004; and automation of trading system in September 2006, inter alia.
Opening of the NSE to foreign portfolio investment may have led to improvement in
trading volumes, enhanced levels of service to stockbrokers and increased volume of capital
raised. . We anticipate that the listing and trading of REITS on the NSE will provide Kenyan
investors with an opportunity to participate in the Real Estate sector at an affordable cost. NSE
held a Futures Market Participants Forum geared at enhancing financial literacy on the Futures
Market, and in particular ensuring that the market participants appreciate the various
opportunities, risks and rewards associated with these new asset classes. We shall shortly run a
market simulation exercise. Futures and Options are among the most affordable and
convenient means companies can cushion themselves against interest rates fluctuations,
exchange rate volatility and commodity
The most common findings by diversification-performance studies to date is that related
diversifiers exemplify higher results in their economic growth Bettis (1981), Varadarajan and
Ramanujam (1987). Other works, however, have illustrated that single product models or
unrelated diversification can be more advantageous than related diversification Lubatkin
(1987). These results have been intuitively enticing as they support the resource-based and
related models of the firm Prahalad and Hamel (1990).
Proponents of unrelated diversification assume that unrelated firms can allocate capital more
efficiently than the external capital market. They then argue that unrelated diversification is
desirable, when maturing markets result in profit erosion, or if the firm aims to modulate risk
6
in a highly cyclical industry Datta (1991). In spite of considerable studies, the findings of
different studies have thus remained contradictory, and the impact of diversity on growth is
yet pinned down.
Few other studies have been done locally over the years Maithulia (1995) did an empirical
investigation of portfolio diversification among Commercial banks in Kenya. Mwindi (2003) did
an analysis of the implication of unrelated diversification strategy by the major oil companies in
Kenya while Njoroge (2003) did a study on diversification strategy focusing on Nation Media
Group. On the other hand Mwau (2005) did a study of related diversification within East Africa
Building Society. Njoroge (2006) too did a study on building competitive advantage through
diversification focusing on Kenol Kobil Oil Corporation. Wakhwoma (2007) did a survey of the
product diversification strategies adopted by firms in the banking industry in Kenya. Munene
(2008) did a study on diversification strategies among Christian Community Services of Mount
Kenya East Region and Lole (2009) did a study on diversification strategies in the banking
industry in Kenya.
This study differs from the above mentioned studies on its focus on the in depth aftermath
effect on the listed companies in the Nairobi Stock Exchange it terms of growth of the
companies. The study therefore seeks to find an answer to the research question: Does
diversification bring about growth in the companies listed in the Nairobi Securities
Exchange?
1.3 Research Objective
To establish the effects of diversification on growth of companies listed in the NSE.
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1.4 Value of the Study
In theory study will be vital since it will also be of importance since the study will enrich the
existing literature on diversification it will also bring out contradictions in the theories and in
the process exemplify the gaps in the theories.
Academically it will also be of importance since the findings of the study will be useful for
enhancing the understanding on the subject of the study and open up new areas for further
academic research to the academic fraternity.
The policy makers would obtain knowledge on diversification effect on growth and would
therefore obtain guidance from this study in designing guidelines to the firms which are
planning for successful diversification or are already in the process.
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CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction
This chapter focuses on diversification strategies employed by established different firms and
their relationships with growth. The chapter will also focus on theories of diversification, as
they are the most applicable to the study and the theoretical foundations that inform the
current study. The chapter then reviews the studies that have been done on the area. A
research gap is then demonstrated from comparing and contrasting the reviewed studies. The
conceptual framework is then crafted based on previous research so as to demonstrate the
relationships between various variables
2.2 Theoretical Review
There are two dimensions of rationale for diversification. The first one relates to the nature
of the strategic objective: Diversification may be defensive or offensive. Defensive reasons
may be spreading the risk of market contraction, or being forced to diversify when current
product or current market orientation seems to provide no further opportunities for growth.
Offensive reasons may be conquering new positions, taking opportunities that promise
greater profitability than expansion opportunities, or using retained cash that exceeds total
expansion needs. The second dimension involves the expected outcomes of diversification:
Management may expect great economic value (growth, profitability) or first and foremost
great coherence and complementary to their current activities (exploitation of know-how,
more efficient use of available resources and capacities). In addition, companies may also
explore diversification just to get a valuable comparison between this strategy and expansion.
Calori and Harvatopoulos (1988).
9
2.2.1 The Resource Review Theory
Based on the work of Penrose (1959) and presuming that firms often possess pools of not
fully exploited or unused resource capacities Mahoney & Pandian (1992), the resource view
focuses on corporate diversification as a strategic growth option Ramanujam & Varadarajan
(1989). A company has several opportunities to take advantage of its excess capacities Teece
(1982): They could be reinvested in the firm's traditional business or be sold to other firms in
other markets. Unused resource which can be translated into free cash flow could be returned
to stockholders through higher dividends.
Firms with excess capacity in resources could also diversify into other markets, either
through acquisition or new market entry. Assuming that firms choose a strategy in order to
generate rents based upon their resource capabilities Mahoney & Pandian, (1992), rentseeking firms thus diversify as long as diversification provides a way of more profitably
employing its underused resources Teece (1982); Montgomery & Wernerfelt (1988).
The consequence under this theory is that gains from this strategy may come from
managerial economies of scale, as proposed by Chandler (1977). As a result predictable
future higher prices, and sustained losses that can be mitigated through cross-subsidization
whereby the firm taps additional revenues from one product to support another through
product diversification
2.2.2 The Agency Theory
The agency theory considers corporate diversification as a result from the separation of
ownership and control which gives managers the opportunity to pursue their own objectives
at the expense of shareholders Jensen & Meckling (1976). Excessive expansion through
diversification might thus occur because of different reasons: In order to increase the firm's
10
demands for their individual skills and knowledge Shleifer and Vishny (1989) or to diversify
the managers‟ own employment risk Amihud & Lev (1981). As the firm‟s growth often
augments not only their compensation, but also the resources under managers‟ control and
therewith their power, managers have incentives to cause their firms growing beyond the
optimal size Jensen (1986).
While agency theory predicts that managers may sustain a diversification strategy
irrespective of doing so reduces shareholder wealth Denis, Denis & Sarin (1999), the
stewardship view presumes that managers are seeking to maximize organizational
performance for the shareholders „welfare Donaldson & Davis (1991). The stewardship view
therefore expects managers to draw diversification decisions in order to enhance a firm‟s
profit and growth prospects Fox & Hamilton (1994); Lane, Cannella & Lubatkin ( 1999).
The implication of agency theory is that managers can pursue their own interests at expense
of shareholders by means of the diversification strategy Jensen (1986). In this way,
diversification allows managers to reduce their personal risk (Amihud and Lev (1981), as
well as increase their compensation, power and prestige (Jensen and Murphy (1990). This
will in turn result in growth of the company as a result of diversification.
2.2.3 The Market View Theory
Rooted in industrial economics, the market power view emphasizes the risk of anticompetitive effects of diversification Montgomery (1994). Thus, conglomerate companies
may exercise market power Edwards (1955); Hill (1985) through e.g. cross-subsidization and
predatory pricing activities, the exploitation of cost opportunities due to synergy effects,
11
reciprocity in buying and selling among large diversified firms which creates or raises entry
barriers to smaller competitors Palepu (1985).
Applying the ideas of industrial economics to the individual enterprise, Porter pointed out
that industry characteristics might be exploited strategically to increase a firm‟s performance
Porter (1980), thereby arguing that diversification is positively related with performance if a
firm is able to generate opportunities in one business or reduce risk in another by diversifying
its activities Porter and Spence (1980).
However, Montgomery (1985) argues that market power theory has overemphasized what
may be termed as collusive or general market power, and underemphasized the roles of
specific skills and specific market power that give firms advantages in individual market
settings. Caves (1981) and Montgomery (1985) present a slightly positive relationship
between the diversification and corporate growth due to the enjoyment of economies of scope
instead of market power. Therefore not all the firms that have dominant market power will
seek to diversify.
2.3 Types of Diversification
Pawaskar (1999) identified two ways by which diversification could be achieved in an
enterprise; internal capacity expansion or mergers and acquisitions. In essence, mode of
diversification is the extent to which a firm relies on internal business development
relative to external acquisitions or mergers as a means of venturing into new business
activities Ramanujam and Varadarajan (1989).
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2.3.1 Concentric Diversification
Concentric diversification occurs when a firm adds related products or markets. The goal of
such diversification is to achieve strategic fit. Strategic fit allows an organization to achieve
synergy. In essence, synergy is the ability of two or more parts of an organization to achieve
greater total effectiveness together than would be experienced if the efforts of the
independent parts were summed.
Synergy may be achieved by combining firms with complementary marketing, financial,
operating, or management efforts. Financial synergy may be obtained by combining a firm
with strong financial resources but limited growth opportunities with a company having great
market potential but weak financial resources Montgomery (1984).
2.3.2 Conglomerate Diversification
Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its
current line of business. Synergy may result through the application of management expertise
or financial resources, but the primary purpose of conglomerate diversification is improved
profitability of the acquiring firm. Little, if any, concern is given to achieving marketing or
production synergy with conglomerate diversification Hill (1985).
One of the most common reasons for pursuing a conglomerate growth strategy is that
opportunities in a firm's current line of business are limited. Finding an attractive investment
opportunity requires the firm to consider alternatives in other types of business. Goold and
Luchs (1993). Firms may also pursue a conglomerate diversification strategy as a means of
increasing the firm's growth rate. Growth in sales may make the company more attractive to
investors. Growth may also increase the power and prestige of the firm's executives.
13
Conglomerate growth may be effective if the new area has growth opportunities greater than
those available in the existing line of business. Probably the biggest disadvantage of a
conglomerate diversification strategy is the increase in administrative problems associated
with operating unrelated businesses Judelson (1969).
2.3.3 Internal Diversification
One form of internal diversification is to market existing products in new markets. A firm
may elect to broaden its geographic base to include new customers, either within its home
country or in international markets. A business could also pursue an internal diversification
strategy by finding new users for its current product new in existing markets Jensen (1993).
It is also possible to have conglomerate growth through internal diversification. This strategy
would entail marketing new and unrelated products to new markets. This strategy is the least
used among the internal diversification strategies, as it is the most risky. It requires the
company to enter a new market where it is not established. The firm is also developing and
introducing a new product. Research and development costs, as well as advertising costs, will
likely be higher than if existing products were marketed. In effect, the investment and the
probability of failure are much greater when both the product and market are new Drucker
(1955).
2.3.4 External Diversification
External diversification occurs when a firm looks outside of its current operations and buys
access to new products or markets. Mergers are one common form of external diversification.
Mergers occur when two or more firms combine operations to form one corporation, perhaps
with a new name. These firms are usually of similar size. One goal of a merger is to achieve
management synergy by creating a stronger management team.
14
This can be achieved in a merger by combining the management teams from the merged
firms. John C Van Horne (1986). Acquisitions, a second form of external growth, occur when
the purchased corporation loses its identity. The acquiring company absorbs it. The acquired
company and its assets may be absorbed into an existing business unit or remain intact as an
independent subsidiary within the parent company. Acquisitions usually occur when a larger
firm purchases a smaller company Copeland & Weston (2003).
2.4 Measures of Growth
Ahlström‟s (1998) model of growth emphasizes the major roles of growth competence and
resources, growth potential and growth ambitions. According to Andersson, Gran &
Mossberg (2007), companies that make an effort to build or develop their competences are
more likely to grow this growth can be measured mainly on firm specific determinants which
include profitability, leverage, innovation, liquidity and solvency.
Making profit is one of the ultimate goals of any economic activity. Profit can be measured
by return on equity (ROE), which is calculated by dividing net profit by shareholders‟ equity.
Shareholder‟s equity represents share capital and proportions of profit retained in the
company fund which is called „retained earnings‟. Although there are other profit measures
available, we prefer to use return on equity (ROE) as this is the most common measure of
profitability in finance. Profitable firms will be more motivated to grow, because they will
not only have the financial means to expand, but their ongoing profit creation will also make
it possible to sustain growth Nelson & Winter (1982).
The pecking order theory states that companies prioritize their sources of financing according
to the principle of least effort. This means that companies first use internal financing at
15
startup. When this is depleted, they use debt financing, and when they cannot get any capital
anymore through debt financing, they raise capital by looking for external equity. This theory
was first suggested by Donaldson (1961) and later on modified by Myers & Majluf (1984).
In the literature, we can find a lot of papers around the relationship between innovation and
economic growth since the development of the Solow growth model, which was introduced
by Robert Solow in 1956. This model is used to measure the economic growth of countries
over a specific period of time. According to Robert Solow, there are three factors which can
influence this economic growth: capital, labor and technology.
We can see this relationship in the following equation:
Y = Ka(AL)1-a
where Y is output, K is capital, A is a labor-augmenting technology factor and L is labor.
Mateev & Anastasov (2010) measured the level of short term liquidity by the current ratio.
This ratio was part of the firm specific characteristics, which may affect the company growth.
The current ratio is calculated by dividing the current assets by the current liabilities. An
increase in the current ratio will reinforce a firm‟s liquidity position
The solvency of a company indicates its health. The solvency ratio is calculated through
dividing shareholders‟ equity by the total assets. The bigger this ratio, the healthier a
company is. A company with a small solvency ratio has little shareholders‟ equity compared
to its liabilities. A company facing this situation has a higher risk of bankruptcy than a
company which has a healthy ratio.When discussing the solvency and growth hypothesis,
much attention will be paid to the theory of Myers & Majluf (1984), better known as the
pecking order theory. Myers & Majluf suggest a hierarchy in the way of financing firm
16
growth. According to them, a company manager will first use retained earnings as input for
investments and will borrow at the next stage.
2.5 Empirical Review
There are many, and somehow contradictory, theoretical arguments in the literature to explain
the relationship between the diversification strategy and firm‟s growth, suggesting that
diversification may have both value enhancing and value reducing effects. The key question
is whether the act of corporate diversification destroys value or, on the contrary, it creates
value.
Ansoff (1958) in his conceptual planning framework for diversification suggested that there
could be a multiple variety of tests that could be used to measure the value of the proposed
diversification on the organisation. He concluded that the most common single test was in the
form of Return on Investment, and his model was one of successive elimination of
alternatives involving the application of qualitative criteria, followed by a mathematical
comparison of potential profit earned before and after a diversification scenario has been
developed for an organisation.
Llewellyn (1971) because it allows the firm to exploit the tax advantages available from
increasing borrowing. However, multi-segment firms enjoy much greater flexibility in capital
formation, since they can access more easily to external sources as well as internally
generated resources. Then, the diversification itself creates internal capital markets that
permit a more competent allocation of resources across businesses, in that case multisegments firms gain considerable financial interests from the use of this internal market and
resources.
17
Multi-segment firms can generate efficiencies that are unavailable to the single-business firm.
In short, all the above mentioned arguments support diversification as a value-creating
strategy.
For instance, the coinsurance effect gives multi-segment firms greater debt
capacity than single-line business of similar size Lewellen (1971). One way in which
increased debt capacity creates value is by increasing interest tax shields, thus multisegment firms are predicted to have higher leverage and lower tax payments than their
business would show if operated separately.
Rumelt's studies are regarded as one of the most influential and widely investigated
typologies in the strategy literature. The findings of Rumelt's (1986) empirical study
conducted on a sample of 246 organisations over a period of two decades from 1949 to 1969
were that; Performance differences existed between the major categories of diversification
strategy.
The differences were however highlighted in more detail once the categories were broken
down into subcategories; the dominant vertical organizations were low performing while the
dominant constrained organizations were among the highest performing, the Related
Constrained subgroup was high performing while the Related Linked subgroup was slightly
below average and the dominant constrained and the related constrained subgroups were the
best overall performers and both strategies were not totally dependent upon a single business
or a true multi-industry organization.
Porter (1987) argued that certain conditions need to be met in order for diversification to
create shareholder value and are called the essential test and various questions to be
18
answered, that is How attractive is the industry? Diversification cannot create shareholder
value unless new industries have favorable structures that support returns in excess of the cost
of capital, and an industry needs to be attractive before diversification commences. Markides
(1992) mentions other costs of diversification, such as control and effort losses (increment of
shirking), coordination costs and other diseconomies related to organization, and discrepancy
for ideas between businesses.
Rotenberg and Saloner (1994). The difficulty in designing optimal incentive compensation
for managers of diversified firms also generates
costs
of
multi-segment
operations
Informational asymmetries between central management and divisional managers will also
lead to higher costs of operating in multiple segments, Finally, although diversification
translates into lower financial risk, it may increase business risk given the different nature
and characteristics of business to be managed. What is unquestionable is that managers of the
multi-segment firm enjoy greater opportunities to undertake projects and greater resources to
do so whenever diversification relaxes the constraints imposed by imperfect external capital
markets.
Moreover, the increment of the market power is determined by the predatory pricing, future
higher prices, and sustained losses that can be founded through cross-subsidization whereby
the firm taps additional revenues from one product to support another Tirole (1995). The
conventional theory posits that one of the positive effects of diversification is the reduction of
the firm‟s risk in the way to be involved in more businesses in its portfolio This risk
reduction is also helpful for debt capacity and cost of capital
19
Particularly, Berger and Ofek (1995) explain the value destruction by means of
overinvestment and cross-subsidization of multi-segment firms. Contrary
to
these
arguments, there is also evidence that indicates that multi-segment firms trade at a discount
relative to a portfolio of single-segment firms. Specifically, he provides an empirical
evidence supporting that multi-segment firms invest inefficiently and, consequently,
trade at a discount in relation to similar constructed portfolios of single-segment firms
From another perspective, Ferris and Sarin (1997) argue that investors prefer focused firms
since it is more convenient for them to achieve the desired level of risk diversification
with pure-play firms. Consequently, diversified firms would trade at a discount because of
lower transparency and lower liquidity. These studies provide empirical evidence on the
value destroying effect of corporate diversification and, consequently, on the existence
of a diversification discount.
The debate about diversification being a value-creating or a value-destroying strategy has
given rise to a closely related line of research based on the existence of a premium or a
discount of the diversification strategy. In this context, the evidence is also mixed. For
instance, Campa and Kedia (2002) and Villalonga (2004) show that, controlling for a firm
propensity to diversify; there is a diversification premium but all. Theoretically, Maksimovic
and Phillips (2002) and Gomes and Livdan (2004) show that, diversification may be a value
creating strategy even if, overall, multi-segment firms have a lower value than singlesegment firms.
20
Mwindi (2003) did a study on analysis of the application of unrelated diversification strategy
by the major oil companies in Kenya found out that contrary to what the diversification
managers had indicated to be the underlying reason for oil companies to engage in non-fuel
business, that is to enter profitable arenas, customer related phenomena such as convenience
tended to take more prominence as an outcome from these undertaking. It can therefore,
based on this premise, be concluded that the concept of unrelated diversification in the
service stations leads itself more towards enhancing customer satisfaction than
improving on the financial performance of the companies.
Mwau (2005) a study of related diversification within East Africa Building Society, found out
that the related diversification the strategy of the EABS had given them a competitive
advantage compared to other mortgage financing and housing development firms which had
never opted for related diversification. It is in justification of sustaining their competitive
advantage that they now wish to move into banking sector and actually close one of its SBUs
which is not performing up to the expectation.
Njoroge (2006) a study on building competitive advantage through diversification. A case
studies of the Kenol/Kobil Oil Corporation. Found out that it was evident from the study that
kenol Kobil had been able to increase its market share both locally and regionally through
diversification, and the unique trading strategy used to support its expansion by providing
alternative financing is the most successful and ingenious strategy considered by the
company.
21
Lole (2006) did a study on the diversification strategies in the banking industry in Kenya
found out that the costs associated with the diversification process included; increased costs
spent on acquiring resources, higher operating costs, technological and marketing costs and
training costs. The benefits included greater income, growth potential, improvement of the
performance of distribution channels, risk control, acquisition of new technology, and change
of business focus.
Wakwoma (2007) a survey of the product diversification strategies adopted by the firms in
the banking industry in Kenya, established that Commercial banks in Kenya undertake
product diversification strategy. The widely practices form of product diversification is
concentric diversification. A practice where new products and services with technological,
marketing and operational synergies with existing product lines are introduce. Therefore a
diversifying company gets into products that can perform better under common management
than they could perform as stand-alone businesses. Benefits accrued from this type of
diversification included, increase in returns and profitability, customer loyalty and stability of
product earnings as main advantages of introducing new products to existing lines.
22
2.6 Summary of Literature Review
In this chapter, the literature review, theoretical framework on diversification is discussed.
Literature on the types of diversification is also reviewed and the empirical evidence on
previous studies carried out on diversification both locally and globally.
Corporate diversification is one of the fundamental strategic alternatives available to
organisations to sustain growth and search for greater profits. International research has been
conducted since the 1950's by Harry Markowitz to establish if diversification creates value
and if it resulted in greater financial growth. The findings are inconsistent and there remains a
lack of consensus regarding the diversification-growth relationship, although there has been a
trend since the 1990's of organisations focusing more on their core competencies.
There are also many arguments that have led scholars to assume that diversification
destroys value. For instance, the agency theory argues that managers can pursue their own
interests at expense of shareholders by means of the diversification strategy Jensen (1986). In
this way, diversification allows managers to reduce their personal risk Amihud and Lev
(1981), as well as increase their compensation, power and prestige Jensen and Murphy
(1990). Moreover, managers of divisions that have a future perspective in the firm are
encouraged to persuade the top management of the firm to conduct resources in their
direction Meyer and Roberts (1992).
It is on this basis that this study was carried out, to establish the effect of diversification on
the growth of listed companies in the NSE.
23
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction
This chapter explains the various research methods and procedures employed in the study. The
chapter discusses research design, categorization of samples, instruments used in the study,
data collection and data analysis
3.2 Research Design
The research was a descriptive study with intention of providing detailed information
regarding the effects of diversification on growth of companies among listed Kenyan
companies. Since this was a statistical study to measure trends of growth of companies.
3.3 Population
The population was a census the companies listed in the Nairobi security exchange from
2008 - 2013.The number of companies listed in the NSE stood at 60 classified into 10
different industries as provided in the appendix 1.
3.4 Data Collection
The study used secondary data to collect information about the company‟s growth. The
source of the data was from the financial statements that were used for collecting information
on growth; the statements that were mainly used were the statement of financial position and
income statement.
24
3.5.1 Data Analysis
After collecting data, it was analyzed using descriptive statistical tools for analysis. These
included correlation, percentages and mean scores. The data was presented in tables and
statistical software; SPSS was used to analyze the findings and present the data.
3.5.1 Analytical Model
In order to study the relationships between growth and diversification and business group
formation it is important to clarify the way in which diversification can measured. In this
study diversification was measured by dependent variable growth and independent
variables; profitability, leverage, liquidity and a natural logarithm of Total assets. Therefore
growth was determined using below regression model below in determining relationship
with a test of 0.05 level of significance will be applied to measure growth.
G = β0 + β1X1 + β2X2 + β3X3 + β4X4
G = Dependent variable
X 1-n =Independent variables
β0
= Constant
B 1-n = Change in Y by each X
Growth was measured by the change in net income growth.
X1
The number of branches
X2 Returns on Equity
X3 Current ratio
X4 Natural logarithm of Total Assets
CHAPTER: FOUR DATA ANALYSIS, RESULTS AND DISCUSSIONS
25
4.1 Introduction
This chapter explains the statistics obtained findings of regression analysis, and interpretation
of these findings.
4.2 Descriptive Statistics
From table 4.1 below, we note that the average proportion of growth of income for years from
2008- 2012 was 5.19. The variable of firms‟ size had a mean of 23.49 in terms of in the size of
the firms as a result of growth. The mean Number of branches was 30.19, return on equity
16.269 and current ratio at 1.7. N 37 due to unavailability of information of some companies
which are listed in the Nairobi Securities Exchange.
Table 4.1 Overall Descriptive Statistics of key variables
Growth in Net Income
No. of Branches
Return on Equity
Current Ratio
Firm Size
N
N Minimum Maximum
37
0.0000
91.3100
37
1
175
37
-4.9840
41.8651
37
.3320
6.5087
37
18.4076
26.3110
37
Mean
5.198378
30.19
16.269725
1.770656
23.478248
Std.
Deviation
16.9765584
49.182
10.4933768
1.2283438
1.7515707
Source: Research Findings
4.3 Regression Analysis
In conducting regression analysis, the dependent variable selected was growth in net income,
while the independent variables were number of branches, return on equity, current ratio and
firm size. The information on all these variables was obtained from the published annual
financial statements for each of the five years (appendix 2). Some companies were not
included in this analysis due to unavailability of the financial reports.
26
An average of the independent and dependent variables for the five year period under review
was obtained(appendix 3) and regressed to give the regression coefficients shown in the the
table 4.2 hereunder
Table 4.2 Regression Coefficients
Model
1 (Constant)
Unstandardized
Coefficients
Std.
B
Error
-46.786
53.447
Standardized
Coefficients
Beta
t
-.875
Sig.
.388
95.0% Confidence
Interval for B
Lower
Upper
Bound
Bound
-155.654
62.082
No. of Branches
-.050
.073
-.145
-.691
.494
-.198
.098
Return on Equity
.019
.287
.012
.066
.948
-.565
.602
Current Ratio
-.335
2.734
-.024
-.122
.903
-5.903
5.233
Firm Size
2.291
2.250
.236
1.018
.316
-2.293
6.875
Dependent variable Growth in net income
Source: Research Findings
Research results shown in the table above indicates that β0 is -46.786 and β1 -.050, β2-0.19,β3
-.335 and β4 2.291.
The summary indicated in table 4.3 below shows that the R squared and the adjusted R
squared values are 0.043 and 0.077 respectively. These two measures show how well the
explanatory variables in the model explain variations in the dependent variables. The study
found a standard error of the estimators is 17.617
27
Table 4.3 Model Summary
Model Summary
Model
R
R Square
Adjusted Std. Error of DurbinR Square the Estimate Watson
1
.207
.043
-.077
17.6176347 1.938
a. Predictors: (Constant), Firm Size, Return on Equity, Current Ratio, No. of Branches
b. Dependent Variable: Growth in Net Income
Source: Research Findings
4.4 Interpretation of the Findings
The study sought to establish the effect of diversification on growth of companies listed in the
NSE. According to the study findings were consistency with Nelson & Winter; Profitable
firms will be more motivated to grow, because they will not only have the financial means to
expand, but their ongoing profit creation will also make it possible to sustain growth. Since
study findings had a positive R squared of 0.043 though very weak. The findings had
inconsistency as earlier predicted that branch expansion had a positive relationship with the
growth of companies. This is because regional expansion may take some time to breakeven
and therefore the net income of the branches may result in a negative relationship with the net
income of the company as a whole. Branch regression as an independent to growth had a
negative relation of
β-0.05. On the other had liquidity of the company measured in terms
liquidity ratio had a negative relationship on growth of the listed companies in the NSE as
earlier predicted.
28
Liquidity had a β 0f -0.335 indicating that growth of companies is not determined by the
healthiness of the company. Prior research suggested that firm diversification may be
financed through increased leverage (Kochhar and Hitt, 1998). Return on equity too on the
other hand had a negative relationship with a β of -0.19 as earlier predicated. Firms‟ size had a
positive relationship with the growth of companies with a β of 2.291 which indicated a strong
relationship with the net income. This can be supported by the agency theory where costs may
be a source a potential investment distortions in diversified firms.
Top management in a diversified firm enjoys greater opportunities to undertake projects, and
also more resources to do so if diversification relaxes constrains imposed by imperfect
external capital markets so that overinvestment may arise (Stulz, 1990; Matsusaka and Nanda,
2002). In conclusion the firms listed in the Nairobi Securities Exchange only had a growth
with a positive relationship with one variable which is the firm‟s size this holds since most of
the net income will be used to acquire assets as a diversification means.
29
CHAPTER FIVE
SUMMARY,CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
This chapter gives a summary of research objectives,methodology and findings,draws
conclusions and recommendations, elaborate on limitation of gthe study and suggests areas
for further research.
5.2 Summary.
The objective of this study was to establish the effects of diversification on growth of listed
companies in the NSE.The research methodology involved the use of secondary data
collected from the published reports of listed companies in the NSE. A regression analysis
was used to establish the relationship between growth and diversification. The research
findings summary indicate that there is a positive realtionship between growth of companies
and diversification though very insiginificant.
5.3 Conclusion
The research findings indicate that there is a relationship between growth and diversification of
companies listed in the NSE. The effect of Diversification solely is not significant enough
given the value of R squared and adjusted R obtained. This means that there are other factors
that have a greater impact on the growth of companies as opposed to diversification.
5.4 Recommendations for Policy
Even though the research indicates that there is a weak relationship between growth and
30
diversification. This does not deter policy makers to engulf the importance of diversification as
a means enhancing growth in the company and also as a means of spreading risk. The study
also provides evidence to the policy that there are other factors that affect growth of companies
other than diversification.
5.5 Limitations of the Study
The limitation of this study arose mainly due to unavailability of annual reports for listed
companies from the NSE website and that of the company. There were also some companies
who gave their consolidated financial statements that included their regional sale where as in
the study we were only interested in Kenyan companies. Another major limitation of the study
was the nature in which the financial statements are maintained in the CMA library which
makes it difficult for one to transfer the data to the working areas, since most of them are either
scanned in a rotated manner.
5.6 Areas for Further Research
A suggestion for further study would be to consider conducting a similar study but looking at a
similar industry to avoid disparity in terms of those firms that do not require branch network to
enhance operation or those that cannot have more branches due to the accessibility of raw
materials. Another research area would be conducting a study on the effects of diversification
on the value of the firm. Lastly a study could be conducted to establish the factors leading to
diversification of firms in the industry.
31
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33
Appendix 1
LISTED COMPANIES IN THE NAIROBI SECURITIES EXCHANGE AS AT 2013
AGRICULTURAL
Eaagads Ltd.
Kapchorua Tea Co. Ltd.
Kakuzi.
Limuru Tea Co. Ltd
Rea Vipingo Plantations Ltd
Sasini Ltd
Williamson Tea Kenya Ltd
COMMERCIAL AND SERVICES
Express Ltd
Kenya Airways Ltd
Nation Media Group.
Standard Group Ltd
TPS Eastern Africa (Serena) Ltd
Scangroup Ltd
Uchumi Supermarket Ltd
Hutchings Biemer Ltd
Longhorn Kenya Ltd
TELECOMMUNICATION AND TECHNOLOGY
AccessKenya Group Ltd .
Safaricom Ltd
AUTOMOBILES AND ACCESSORIES
Car and General (K) Ltd
CMC Holdings Ltd
Sameer Africa Ltd
Marshalls (E.A.) Ltd
BANKING
Barclays Bank Ltd
CFC Stanbic Holdings Ltd .
I&M Holdings Ltd
Diamond Trust Bank Kenya Ltd
Housing Finance Co Ltd
Kenya Commercial Bank Ltd
National Bank of Kenya Ltd
NIC Bank Ltd 0rd
Standard Chartered Bank Ltd
Equity Bank Ltd
The Co-operative Bank of Kenya Ltd
INSURANCE
Jubilee Holdings Ltd
Pan Africa Insurance Holdings Ltd 0rd
Kenya Re-Insurance Corporation Ltd
CFC Insurance Holdings
British-American Investments Company ( Kenya) Ltd
CIC Insurance Group Ltd
34
INVESTMENT
Olympia Capital Holdings ltd
Centum Investment Co Ltd
Trans-Century Ltd
MANUFACTURING AND ALLIED
B.O.C Kenya Ltd
British American Tobacco Kenya Ltd
Carbacid Investments Ltd
East African Breweries Ltd
Mumias Sugar Co. Ltd
Unga Group Ltd
Eveready East Africa Ltd .
Kenya Orchards Ltd
MANUFACTURING AND ALLIED
A.Baumann CO Ltd
Athi River Mining
Bamburi Cement Ltd
Crown Berger Ltd 0rd
E.A.Cables Ltd
E.A.Portland Cement Ltd
ENERGY AND PETROLEUM
Kenol Kobil Ltd
Total Kenya Ltd
KenGen Ltd.
Kenya Power & Lighting Co Ltd
https://www.nse.co.ke/listed-companies/list
35
Appendix 2
Variable averages
N COMPANY
1 ACCESS KENYA
2 ATHI RIVER
3 BAMBURI
4 BAICL
5 BBK
6 CENTUM
7 CFC
8 CMC
9 COOP
10 DTB
11 EAST AFRICA PORTLAND
12 EVEREADY
13 EXPRESS KENYA
14 HOUSING FINANCE
15 JUBILEE
16 KAKUZI
17 KCB
18 KENGEN
19 KENOKOBIL
20 KENYA RE
21 KPLC
22 LIMURU TEA
23 MUMIAS
24 NATION MEDIA
25 NATIONAL BANK
26 NIC BANK
27 OLYMPIA
28 PAN AFRICA
29 REA VIPINGO
30 SAFARICOM
31 SAMEER
32 SASINI
33 SCAN GROUP
34 STANDARD GROUP
35 TOTAL
36 TPS SERENA
37 UNGA
38 WILLIAMSON TEA
Av of Sales
Av. Net Income Shareholders Eqty Av. Of C.Assets
Av of C. Liabilities Av.of T.Assets Branches
1,771,491.25
334,355.80
1,024,068.25
654,272.50
735,663.00
1,994,723.75
1
7,062,105.20
924,126.40
5,281,749.20
4,664,649.80
4,063,190.60
15,655,639.60
1
31,782,200.00 5,284,400.00
14,156,400.00
13,098,000.00
5,991,800.00
34,034,600.00
1
4,748,127.20
732,109.60
8,650,863.00
18,401,431.60
14,992,094.80
19,027,906.00
15
18,228,400.00 7,808,400.00
24,632,000.00
167,750,600.00
144,536,200.00 171,531,200.00
119
1,109,020.20
981,341.80
8,370,189.60
6,495,825.00
998,017.80
9,368,167.40
13
7,514,332.20 1,473,847.20
22,185,641.00
105,928,223.40
109,185,610.00 134,456,624.20
13
8,352,145.50 1,273,284.50
4,829,020.50
10,500,339.50
7,253,958.00
12,658,331.00
7
11,355,108.60 4,598,636.80
19,946,150.00
136,683,009.00
136,745,074.75 143,560,431.20
104
7,677,314.00 2,168,825.20
9,991,728.80
88,139,033.40
78,481,479.20
89,929,236.80
90
30,344,239.60
253,377.20
5,274,502.00
2,889,391.00
1,780,203.60
12,153,750.00
1
1,607,462.00
(17,295.00)
347,008.67
776,107.25
616,464.00
990,422.25
1
751,435.50
31,060.25
422,279.50
164,162.75
494,487.75
1,183,745.50
1
2,826,458.60
423,158.20
4,728,481.00
33,361,185.33
29,331,291.33
26,927,923.20
10
9,774,941.00 1,532,184.60
5,516,289.00
31,455,739.80
26,418,116.60
32,017,594.40
16
2,028,002.25
512,152.20
2,244,884.20
1,209,856.60
360,070.20
2,753,708.75
1
25,361,740.60 7,727,422.20
36,145,046.80
259,344,330.60
230,989,908.80 267,134,955.60
175
13,117,419.60 3,231,400.00
69,102,340.40
19,640,266.60
9,336,124.80 138,077,269.00
20
146,071,549.40
216,195.40
10,116,623.50
28,098,698.75
12,992,815.75
44,195,946.00
160
4,682,655.00 1,570,997.50
9,466,034.00
14,036,095.00
5,405,905.50
15,874,618.25
1
37,395,434.00 4,719,460.20
32,517,758.20
26,044,321.00
23,060,340.80
66,329,463.40
59
100,622.60
50,518.60
120,670.00
61,750.33
10,977.40
98,696.80
1
13,793,711.75 1,582,354.25
11,139,206.25
5,670,357.50
2,900,150.50
18,284,729.25
1
9,927,280.00 1,892,980.00
5,579,260.00
3,602,150.00
3,228,420.00
5,265,050.00
1
5,039,056.50 1,567,899.25
8,625,405.50
53,499,976.00
47,047,424.00
55,697,829.50
27
6,170,800.20 1,946,249.60
9,343,161.60
48,687,170.40
57,961,614.40
67,304,776.00
23
785,566.80
34,523.60
664,488.60
453,579.40
328,975.80
1,109,265.40
1
3,253,592.00
268,897.75
1,616,492.75
8,889,514.25
7,340,705.25
8,957,198.00
14
1,771,305.20
246,417.20
1,206,144.00
732,990.60
379,784.20
1,883,684.40
1
83,527,483.60 13,064,912.80
63,145,370.00
19,171,220.00
33,311,596.00
82,219,914.40
36
3,457,190.60
130,590.40
2,232,557.20
2,200,609.40
778,172.00
3,090,312.00
1
2,276,270.40
594,789.00
5,437,089.80
1,052,501.60
489,732.40
7,710,671.80
1
7,578,824.20
604,129.40
3,455,606.00
5,888,864.60
2,934,581.80
6,490,687.00
1
11,591,472.00 5,453,222.40
19,453,870.80
141,933,095.40
125,549,881.60 144,988,834.40
34
80,141,021.60
486,122.40
9,389,616.00
20,215,139.40
17,220,758.60
28,921,885.40
150
4,518,681.80
453,451.00
5,599,636.40
1,612,070.20
1,416,663.25
8,761,428.00
15
12,362,024.40
316,852.80
3,441,861.00
3,784,496.80
1,709,922.20
5,502,129.00
1
2,458,248.40
525,826.60
3,568,062.00
1,585,303.40
683,845.60
5,221,233.20
1
Appendix 3
Ratio Anlaysis
N
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
GRWTH.net income
BRANCHES
Y
X1
ACCESS KENYA
4.16
1.00
ATHI RIVER
1.68
1.00
BAMBURI
(0.39)
15.00
BAICL
1.85
119.00
BBK
(0.66)
13.00
CENTUM
1.65
13.00
CFC
(0.78)
7.00
CMC
3.13
104.00
COOP
(0.50)
90.00
DTB
(0.47)
1.00
EAST AFRICA PORTLAND
(0.93)
1.00
EVEREADY
0.22
1.00
EXPRESS KENYA
10.20
10.00
HOUSING FINANCE
0.17
16.00
JUBILEE
(0.59)
1.00
KAKUZI
15.10
175.00
KCB
0.91
20.00
KENGEN
(0.85)
160.00
KENOKOBIL
(0.06)
1.00
KENYA RE
2.44
59.00
KPLC
(1.00)
1.00
LIMURU TEA
91.31
1.00
MUMIAS
(0.50)
1.00
NATION MEDIA
0.55
27.00
NATIONAL BANK
0.08
23.00
NIC BANK
(0.93)
1.00
OLYMPIA
1.43
14.00
PAN AFRICA
(0.25)
1.00
REA VIPINGO
51.35
36.00
SAFARICOM
(0.96)
1.00
SAMEER
1.44
1.00
SASINI
(0.36)
1.00
SCAN GROUP
4.63
34.00
STANDARD GROUP
(0.52)
150.00
TOTAL
(0.40)
15.00
TPS SERENA
(0.39)
1.00
UNGA
0.04
1.00
ROE
X2
17.49659753
37.32869939
8.462850469
31.70022735
11.72424816
6.643248216
26.3673451
23.05526029
21.70620564
4.803812758
-4.984025375
7.355377185
8.949136097
27.77564047
22.81419238
21.37892432
4.676252615
2.137031194
16.59615315
14.51348574
41.8650866
14.20526934
33.92887229
18.17768741
20.83073892
5.195514265
16.63464003
20.43016423
20.69021498
5.849364128
10.93947354
17.48258916
28.03155452
5.177234085
8.097865069
9.205856948
14.73703652
CURRENT RATIO
X3
1.148026332
2.185987516
1.227408968
1.160613051
6.508726598
0.970166521
1.447532437
0.999546121
1.123055201
1.623067721
1.258966055
0.331985474
1.137392314
1.190688204
3.360057567
1.122751777
2.103685096
2.162633512
2.596437359
1.12939879
5.625223945
1.955194222
1.115762509
1.137149953
0.839989895
1.378762207
1.210989128
1.930018679
0.575511903
2.827921591
2.14913614
2.006713393
1.130491671
1.17388205
1.13793465
2.21325672
2.318218323
FIRM SIZE
X4
23.47409705
24.25064349
23.66917248
25.86803101
22.96058333
25.62450749
23.26158141
25.69002191
25.22228894
23.2209036
20.71364193
20.8919494
24.01642962
24.18955141
21.73621448
26.31101982
25.65107929
24.5118989
23.48798733
24.91790003
18.40756308
23.62933208
22.38435648
24.74320702
24.93249704
20.82696383
22.91572329
21.35649548
25.13266338
21.85153789
22.76587115
22.59363422
25.69992257
24.08786443
22.89362474
22.42840095
22.37599946
Appendix 4
Companies whose data was inaccessible
N
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
COMPANY
A.Baumann CO Ltd
B.O.C Kenya Ltd
Bamburi Cement Ltd
British American Tobacco Kenya Ltd
Car and General (K) Ltd
Carbacid Investments Ltd
CIC Insurance Group Ltd
Crown Berger Ltd 0rd
E.A.Cables Ltd
Eaagads Ltd.
East African Breweries Ltd
Hutchings Biemer Ltd
I&M Holdings Ltd
Kapchorua Tea Co. Ltd.
Kenya Orchards Ltd
Longhorn Kenya Ltd
Marshalls (E.A.) Ltd
Standard Chartered Bank Ltd
Trans-Century Ltd
Uchumi Supermarket Ltd
Williamson Tea Kenya Ltd