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

i

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……………………..

ii

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.

iii

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.

iv

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.

v

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

vi

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

vii

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

viii

List of Tables

4.1 Overall descriptive statics ................................................................................................. 27

4.2 Regression Analyisis .......................................................................................................... 28

4.3 Model Summary ................................................................................................................ 28

1

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

2

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.

3

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

4

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)

5

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.

6

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

7

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.

8

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.

9

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).

10

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), rent-

seeking 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

11

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 anti-

competitive 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,

12

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).

13

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.

14

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.

15

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

16

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

17

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 multi-

segments firms gain considerable financial interests from the use of this internal market and

resources.

18

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 multi-

segment 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

19

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

20

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 single-

segment firms.

21

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.

22

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.

23

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.

24

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.

25

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

26

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

N Minimum Maximum Mean

Std.

Deviation

Growth in Net Income 37 0.0000 91.3100 5.198378 16.9765584

No. of Branches 37 1 175 30.19 49.182

Return on Equity 37 -4.9840 41.8651 16.269725 10.4933768

Current Ratio 37 .3320 6.5087 1.770656 1.2283438

Firm Size 37 18.4076 26.3110 23.478248 1.7515707

N 37

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.

27

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

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

95.0% Confidence

Interval for B

B

Std.

Error Beta

Lower

Bound

Upper

Bound

1 (Constant) -46.786 53.447 -.875 .388 -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

28

Table 4.3 Model Summary

Model Summary

Model R R Square Adjusted

R Square

Std. Error of

the Estimate

Durbin-

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.

29

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.

30

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

31

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.

32

REFERENCES

Alchian A. (1950) Uncertainty, evolution, and economic theory, The Journal of Political Economy.

Audretsch D.B. and Elston J.A. (2002) Does firm size matter? Evidence on the impact of liquidity

constraints on firm investment behavior in Germany, International Journal of Industrial

Organization, 20 (1)

Beck T., Demirgüç-Kunt A. and Maksimovic V. (2005) Financial and legal constraints to growth:

does firm size matter? The Journal of Finance, 50 (1),

Bergström F. (2000) Capital Subsidies and the Performance of Firms, Small Business Economics,

Bottazzi G., Dosi G., Lippi M., Pammolli F. and Riccaboni M. (2001) Innovation and Corporate

Growth in the Evolution of the Drug Industry, International Journal of Industrial

Organization, 19

Chandler G.N. and Jansen E. (1992) The founder‟s self-assessed competence and venture

performance, Journal of Business Venturing, 7

Churchill N. and Lewis V. (1983) The five stages of small business growth, Harvard Business

Review, 61 (3)

Evans D.S. (1987) Tests of alternative theories of firm growth,The Journal of Political Economy,95.

Gill A. and Mathur N. (2011) Factors that Affect Potential Growth of Canadian Firms, Journal of

Applied Finance & Banking, 1 (4).

Https://www.nse.co.ke/listed-companies/list.html

Jang S. and Park K. (2011) Inter-relationship between firm growth and profitability, International

Journal of Hospitality Management, 30,

Lumby S. and Jones C. (2003) Corporate Finance Theory and Practice 7th Edition

Miller K. D and Bromiley P. (1990), Strategic risk and corporate performance: An analysis of

alternative risk measurements. Academy of Management Journal 33.

33

Montgomery C. A. and Singh H. (1984),Diversification strategy and systematic risk.

Strategic Management Journal 5th

Edition

Markides C. C. (1992) Consequence of corporate refocusing Ex ante evidence. Academy

of Management Journal 35

Myers S.C. and Majluf N.F. (1984) Corporate financing and investment decision when firms have

information that investors do not have, Journal of Financial Economics,

Phillips B. and Kirchhoff B. (1989) Formation, growth and survival; Small firm dynamics in the

US economy, Small Business Economics,

Roper S. (1997) Product Innovation and Small Business Growth: A Comparison of the Strategies

of German, UK and Irish Companies, Small Business Economics, 9

Rumelt, R (1987), Diversification Strategy and Profitability. Strategic Management

Journal Vol.3

34

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

35

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

Appendix 2 Variable averages

N COMPANY Av of Sales Av. Net Income Shareholders Eqty Av. Of C.Assets Av of C. Liabilities Av.of T.Assets Branches

1 ACCESS KENYA 1,771,491.25 334,355.80 1,024,068.25 654,272.50 735,663.00 1,994,723.75 1

2 ATHI RIVER 7,062,105.20 924,126.40 5,281,749.20 4,664,649.80 4,063,190.60 15,655,639.60 1

3 BAMBURI 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 BAICL 4,748,127.20 732,109.60 8,650,863.00 18,401,431.60 14,992,094.80 19,027,906.00 15

5 BBK 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

6 CENTUM 1,109,020.20 981,341.80 8,370,189.60 6,495,825.00 998,017.80 9,368,167.40 13

7 CFC 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 CMC 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

9 COOP 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

10 DTB 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

11 EAST AFRICA PORTLAND 30,344,239.60 253,377.20 5,274,502.00 2,889,391.00 1,780,203.60 12,153,750.00 1

12 EVEREADY 1,607,462.00 (17,295.00) 347,008.67 776,107.25 616,464.00 990,422.25 1

13 EXPRESS KENYA 751,435.50 31,060.25 422,279.50 164,162.75 494,487.75 1,183,745.50 1

14 HOUSING FINANCE 2,826,458.60 423,158.20 4,728,481.00 33,361,185.33 29,331,291.33 26,927,923.20 10

15 JUBILEE 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

16 KAKUZI 2,028,002.25 512,152.20 2,244,884.20 1,209,856.60 360,070.20 2,753,708.75 1

17 KCB 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

18 KENGEN 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

19 KENOKOBIL 146,071,549.40 216,195.40 10,116,623.50 28,098,698.75 12,992,815.75 44,195,946.00 160

20 KENYA RE 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

21 KPLC 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

22 LIMURU TEA 100,622.60 50,518.60 120,670.00 61,750.33 10,977.40 98,696.80 1

23 MUMIAS 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

24 NATION MEDIA 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

25 NATIONAL BANK 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

26 NIC BANK 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

27 OLYMPIA 785,566.80 34,523.60 664,488.60 453,579.40 328,975.80 1,109,265.40 1

28 PAN AFRICA 3,253,592.00 268,897.75 1,616,492.75 8,889,514.25 7,340,705.25 8,957,198.00 14

29 REA VIPINGO 1,771,305.20 246,417.20 1,206,144.00 732,990.60 379,784.20 1,883,684.40 1

30 SAFARICOM 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

31 SAMEER 3,457,190.60 130,590.40 2,232,557.20 2,200,609.40 778,172.00 3,090,312.00 1

32 SASINI 2,276,270.40 594,789.00 5,437,089.80 1,052,501.60 489,732.40 7,710,671.80 1

33 SCAN GROUP 7,578,824.20 604,129.40 3,455,606.00 5,888,864.60 2,934,581.80 6,490,687.00 1

34 STANDARD GROUP 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

35 TOTAL 80,141,021.60 486,122.40 9,389,616.00 20,215,139.40 17,220,758.60 28,921,885.40 150

36 TPS SERENA 4,518,681.80 453,451.00 5,599,636.40 1,612,070.20 1,416,663.25 8,761,428.00 15

37 UNGA 12,362,024.40 316,852.80 3,441,861.00 3,784,496.80 1,709,922.20 5,502,129.00 1

38 WILLIAMSON TEA 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 GRWTH.net incomeBRANCHES ROE CURRENT RATIO FIRM SIZE

Y X1 X2 X3 X4

1 ACCESS KENYA 4.16 1.00 17.49659753 1.148026332 23.47409705

2 ATHI RIVER 1.68 1.00 37.32869939 2.185987516 24.25064349

3 BAMBURI (0.39) 15.00 8.462850469 1.227408968 23.66917248

4 BAICL 1.85 119.00 31.70022735 1.160613051 25.86803101

5 BBK (0.66) 13.00 11.72424816 6.508726598 22.96058333

6 CENTUM 1.65 13.00 6.643248216 0.970166521 25.62450749

7 CFC (0.78) 7.00 26.3673451 1.447532437 23.26158141

8 CMC 3.13 104.00 23.05526029 0.999546121 25.69002191

9 COOP (0.50) 90.00 21.70620564 1.123055201 25.22228894

10 DTB (0.47) 1.00 4.803812758 1.623067721 23.2209036

11 EAST AFRICA PORTLAND (0.93) 1.00 -4.984025375 1.258966055 20.71364193

12 EVEREADY 0.22 1.00 7.355377185 0.331985474 20.8919494

13 EXPRESS KENYA 10.20 10.00 8.949136097 1.137392314 24.01642962

14 HOUSING FINANCE 0.17 16.00 27.77564047 1.190688204 24.18955141

15 JUBILEE (0.59) 1.00 22.81419238 3.360057567 21.73621448

16 KAKUZI 15.10 175.00 21.37892432 1.122751777 26.31101982

17 KCB 0.91 20.00 4.676252615 2.103685096 25.65107929

18 KENGEN (0.85) 160.00 2.137031194 2.162633512 24.5118989

19 KENOKOBIL (0.06) 1.00 16.59615315 2.596437359 23.48798733

20 KENYA RE 2.44 59.00 14.51348574 1.12939879 24.91790003

21 KPLC (1.00) 1.00 41.8650866 5.625223945 18.40756308

22 LIMURU TEA 91.31 1.00 14.20526934 1.955194222 23.62933208

23 MUMIAS (0.50) 1.00 33.92887229 1.115762509 22.38435648

24 NATION MEDIA 0.55 27.00 18.17768741 1.137149953 24.74320702

25 NATIONAL BANK 0.08 23.00 20.83073892 0.839989895 24.93249704

26 NIC BANK (0.93) 1.00 5.195514265 1.378762207 20.82696383

27 OLYMPIA 1.43 14.00 16.63464003 1.210989128 22.91572329

28 PAN AFRICA (0.25) 1.00 20.43016423 1.930018679 21.35649548

29 REA VIPINGO 51.35 36.00 20.69021498 0.575511903 25.13266338

30 SAFARICOM (0.96) 1.00 5.849364128 2.827921591 21.85153789

31 SAMEER 1.44 1.00 10.93947354 2.14913614 22.76587115

32 SASINI (0.36) 1.00 17.48258916 2.006713393 22.59363422

33 SCAN GROUP 4.63 34.00 28.03155452 1.130491671 25.69992257

34 STANDARD GROUP (0.52) 150.00 5.177234085 1.17388205 24.08786443

35 TOTAL (0.40) 15.00 8.097865069 1.13793465 22.89362474

36 TPS SERENA (0.39) 1.00 9.205856948 2.21325672 22.42840095

37 UNGA 0.04 1.00 14.73703652 2.318218323 22.37599946

Appendix 4

Companies whose data was inaccessible

N COMPANY

1 A.Baumann CO Ltd

2 B.O.C Kenya Ltd

3 Bamburi Cement Ltd

4 British American Tobacco Kenya Ltd

5 Car and General (K) Ltd

6 Carbacid Investments Ltd

7 CIC Insurance Group Ltd

8 Crown Berger Ltd 0rd

9 E.A.Cables Ltd

10 Eaagads Ltd.

11 East African Breweries Ltd

12 Hutchings Biemer Ltd

13 I&M Holdings Ltd

14 Kapchorua Tea Co. Ltd.

15 Kenya Orchards Ltd

16 Longhorn Kenya Ltd

17 Marshalls (E.A.) Ltd

18 Standard Chartered Bank Ltd

19 Trans-Century Ltd

20 Uchumi Supermarket Ltd

21 Williamson Tea Kenya Ltd