Government Ownership and Financial Performance. Evidence from Listed Firms in Nairobi Securities Exchange

Keywords: Government Ownership; Financial Performance; Nairobi Securities Exchange; Listed Firms

Paper Type: Research Article

Recommended citation: Rotich, D. K., Rono, L., & Tenai, J. (2026). Government ownership and financial performance: Evidence from listed firms in Nairobi Securities Exchange. Journal of Economics, Management Sciences and Procurement, 5(1), 81-94.

1 Introduction

The relationship between government ownership and firm performance has been a matter of extensive debate in corporate finance and public policy. Worldwide, governments have held equity stakes in firms for reasons ranging from industrial development and controlling strategic resources to mitigating market failures and achieving social welfare objectives (Shleifer & Vishny, 1994; Megginson & Netter, 2001). In developed economies, state ownership still offers stability and risk management through the utilization of public resources and institutional support (Borisova et al., 2015). However, evidence from developing countries is mixed: whereas some indicate that government ownership might enhance performance by ensuring credibility and easy access to credit (Yu, 2013; Chen et al., 2014), others point out inefficiencies attributed to agency conflicts, political interference and a lack of market discipline (Fan, Wong & Zhang, 2013).

In the Kenyan context, state participation in listed firms has persisted through parastatals and government stakes in sectors such as energy, banking, manufacturing, and transport. Firms such as Kenya Power, KenGen, and Kenya Commercial Bank (KCB) exemplify strong government presence on the Nairobi Securities Exchange (NSE). On the one hand, state ownership conveys legitimacy, implicit government guarantees, and access to cheaper financing (Faccio, 2006). On the other hand, prior studies in Kenya indicate that political pressures may hinder efficiency and profitability (Ongore & K’Obonyo, 2011; Kiruri, 2013). This tension presents a paradox: government ownership may simultaneously provide resource advantages and impose governance costs.

The enactment of the Privatisation Act 2023 in Kenya, which has refreshed the debate on the policy of whether to retain or dilute state stakes in listed firms. The Act re-establishes the Privatisation Authority and outlines frameworks for the transfer of state-owned enterprises (GoK, 2023). Against this backdrop, empirical evidence on whether government ownership enhances or undermines financial performance is crucial for informing privatization policy and managerial strategies.

This study contributes to the literature by examining listed firms on the NSE over the period 2012–2022. Unlike prior Kenyan studies that often focus on single sectors or short timeframes, we employ panel data from 41 firms and apply rigorous diagnostic and econometric tests, including Hausman and Fisher-type unit root tests, to ensure robustness. The findings present nuanced evidence that government ownership positively affects Return on Equity, contrary to the dominant local narrative of inefficiency associated with state intervention.

The rest of the debate presents the literature review, the empirical and methodological frameworks and presents the results of the study. This is followed by a discussion of the findings and conclusion of the debate regarding government ownership and financial performance.

2 Theoretical Framework

This study is anchored on three complementary theories: agency theory, resource dependence theory, and stakeholder theory. Agency theory (Jensen & Meckling, 1976) provides a foundational lens for understanding potential inefficiencies from government ownership. It posits that separation of ownership and control results in agency costs, with managers pursuing personal interests at the expense of shareholders. In firms that have government equity stakes, an extra layer of complexity is introduced as managers may be subject to political or bureaucratic pressures instead of maximizing value, which leads to inefficiency as well as suboptimal performance (Shleifer & Vishny, 1994).

Resource dependence theory (Pfeffer & Salancik, 1978), posits that firms depend on external actors for critical resources and that strategic relationships with powerful entities, such as the government, enhance access to financing, contracts, and legitimacy. Government ownership can thus be viewed as a mechanism of resource assurance, reducing uncertainty and strengthening firm performance in contexts of weak institutional environments (Hillman, Withers, & Collins, 2009).

Stakeholder theory (Freeman, 1984) complements these perspectives by emphasising that firms must balance the interests of multiple constituencies, not only shareholders. Government involvement signals heightened social and public accountability, compelling firms to operate transparently and responsibly. This can enhance reputation and investor confidence, thereby improving performance (Donaldson & Preston, 1995).

Together, these theoretical perspectives offer a balanced framework: agency theory highlights the potential costs of government ownership, while resource dependence and stakeholder theories underscore its potential benefits. This integrated approach motivates the hypothesis tested in this study.

3 Empirical Framework (Hypotheses Development)

Empirical evidence on the nexus between government ownership and firm performance is mixed across contexts. In developed economies, Borisova et al. (2015) find that government ownership reduces cost of debt and stabilizes firms during crises. Similarly, Faccio (2006) shows politically connected firms enjoy easier access to credit and tax advantages. In emerging markets, Yu (2013) reports that state-owned listed firms in China outperform private firms due to resource advantages, while Chen et al. (2014) argue that government ownership improves profitability by enhancing legitimacy and reducing information asymmetry.

Conversely, studies in Sub-Saharan Africa often find negative or insignificant effects. Fan, Wong and Zhang (2013) attribute underperformance of state-owned firms to political interference and soft budget constraints. In Kenya, Ongore and K’Obonyo (2011) find that ownership concentration and government stakes negatively affect firm performance, while Kiruri (2013) notes inefficiencies in firms with high government ownership. Similarly, Ali Baber (2020) find that government ownership has no significant effect on the performance of listed firms at the NSE, suggesting that governance mechanisms may be more critical than ownership structure per se.

This divergence suggests that the performance impact of government ownership is context-dependent, influenced by the institutional environment, sector composition, and governance quality. Kenya’s ongoing privatization debate underscores the need for updated evidence using robust panel methods.

H1: Government ownership has a positive and significant effect on the financial performance of listed firms at the Nairobi Securities Exchange.

4 Methodology

Target Population, Inclusion and Exclusion Criteria

This study targeted listed firms on the NSE from 2012 to 2022. Out of 65 listed firms, the study retained 41 firms that had complete data for the entire study period. Firms were excluded if they were listed after 2012, delisted during the period, or had missing audited financial statements for more than two consecutive years. This filtering ensured a balanced panel dataset. The final sample resulted in 451 firm-year observations (41 firms × 11 years), which is consistent with approaches used in recent panel data studies (Bai, 2025).

Data Collection and Measurement of Variables

Secondary data were collected from audited financial statements, NSE handbooks, and company annual reports. The dependent variable, financial performance, was measured using Return on Equity (ROE), defined as net income divided by shareholders’ equity. Government ownership (GO) was measured as the percentage of shares held by the government or its agencies. Firm size (FS) was measured as the natural logarithm of total assets, while firm age (FA) was operationalised as the number of years since incorporation. These measures are widely used in prior literature (Ongore & K’Obonyo, 2011; Chen et al., 2014).

Data Analysis and Model Specification

The study adopted an explanatory research design using panel data techniques. Diagnostic tests were conducted for normality (Skewness/Kurtosis and Jarque–Bera), autocorrelation (Wooldridge), heteroscedasticity (White’s), and multicollinearity (VIF). Stationarity was assessed using Fisher-type unit root tests. Correlation analysis provided preliminary associations among variables, and model selection between fixed and random effects was guided by the Hausman test. The results suggested the random effects model was appropriate. The regression model was specified as follows:

FP = β0it + β1 fait + β2 fsit + β3 GOit + eit

Where;
FP = Financial Performance
β0 = constant
fai = firm age
fsi = firm size
GO = Government ownership
β1, β2, β3 = coefficients
e = error term
i = number of listed firms
t = time period (years)

5 Findings and Discussions

Descriptive Analysis

Table 1 presents the descriptive statistics for the variables. Financial performance (ROE) had a mean of 4.8 with a standard deviation of 6.30, ranging from a minimum of –11.6 to a maximum of 26.6. The distribution was positively skewed (1.31) with kurtosis of 6.55, indicating leptokurtic behaviour with heavy tails. Government ownership averaged 10.4 percent but varied widely, from firms with no government involvement (0 percent) to firms with a 70 percent government stake. The coefficient of variation (CV = SD/Mean × 100) for ROE was 1.67, not 131 or 167; similarly, GO had a CV of 1.67? Wait—Table 1 reports CV for GO as 1.93 and for ROE as 6.55 under kurtosis (see table). Firm size had a mean of 6.90 (log of assets) with a moderate spread, while firm age averaged 72.85 years, ranging from 11 to 161 years, reflecting the long establishment history of many listed firms at the NSE.

Source: Research Data (2025)
Key: ROE = Return on Equity (financial performance), GO = Government Ownership (%), FS = Firm Size (log of total assets), FA = Firm Age (years)

Diagnostic Tests

Table 2 summarises diagnostic checks. Normality tests (Skewness/Kurtosis and Jarque–Bera) yielded p-values greater than 0.05, leading to a failure to reject the null hypothesis of normality. The Wooldridge test indicated no first-order autocorrelation (F(1, 40) = 5.724, p = 0.215). However, White’s test revealed presence of heteroscedasticity (χ²(9) = 89.03, p < 0.05), consistent with Ling, L., [8] (2023), which justifies the use of robust standard errors. Multicollinearity was not a concern, with a mean VIF of 1.15 (< 10).

Unit Root Test

The Fisher-type unit root test (Table 3) rejected the null hypothesis of unit roots for all variables (p < 0.05), indicating that the data are stationary at level form. This confirms the suitability of the data for panel regression analysis without differencing.

Correlation Results

The correlation results in Table 4 reveal that government ownership (GO) is positively and significantly correlated with financial performance (FP) (r = 0.229, p < 0.01). Firm age (FA) also showed a positive and significant association with FP (r = 0.265, p < 0.01), while firm size (FS) had a small but significant correlation (r = 0.114, p < 0.05). The inter-variable correlations were low (all < 0.30), suggesting no severe multicollinearity, consistent with the VIF results.

*Note: **p < 0.01, p < 0.05

Hypotheses Testing

Table 6 presents the random effects regression results. The Hausman test (χ²(5) = 7.79, p = 0.1684) indicated no significant difference between fixed and random effects estimators, supporting the use of the random effects model (Table 5).

The overall model was statistically significant (Wald χ²(5) = 141.14, p < 0.001), with within, between and overall R² values of 0.188, 0.560 and 0.544, respectively. Government ownership (GO) exhibited a positive and significant effect on financial performance (β = 0.313, p = 0.006), implying that a one-unit increase in government ownership results in a 0.313-unit increase in ROE, holding other factors constant. This indicates that firms with higher state ownership performed better financially during the study period.

Firm size (FS) showed a negative effect (β = –0.021, p = 0.023), suggesting that larger firms may face higher operational inefficiencies or resource misallocation. Firm age (FA), on the other hand, had a strong positive effect (β = 0.173, p < 0.001), consistent with the notion that older firms accumulate experience, reputation, and networks that enhance performance.

These findings support H1 that government ownership significantly and positively influences the financial performance of listed firms in Kenya.

6 Discussion of the Findings

Our findings challenge the long-standing narrative in Kenya that government ownership impedes firm performance (Ongore & K’Obonyo, 2011). Instead, the evidence suggests that state involvement provides firms with legitimacy, credibility with investors, and access to financing advantages, consistent with resource dependence theory (Pfeffer & Salancik, 1978) and findings from China and advanced economies (Borisova et al., 2015; Yu, 2013).

The positive relationship can also be explained by Kenya’s institutional environment, where government-backed firms may benefit from regulatory goodwill, government contracts, and implicit bailout guarantees (Faccio, 2006). In such contexts, state ownership reduces information asymmetry and strengthens stakeholder confidence.

However, the effect is not without nuance. While firm size negatively affected performance, suggesting diseconomies of scale or bureaucratic inefficiencies in larger state-linked firms, firm age significantly enhanced performance, underscoring learning and reputational benefits.

7 Conclusion

This study concludes that government ownership positively and significantly influences the financial performance of listed firms at the NSE. In a context where privatization remains contested, the results suggest that state involvement, when coupled with strong governance, can improve firm outcomes. The positive influence of firm age and the weak negative effect of firm size further indicate that experience and operational efficiency matter in shaping performance.

8 Recommendations

Based on the findings, the study recommends that:

Policy makers should exercise caution in pursuing rapid privatization. Instead, they should strengthen governance frameworks in state-linked firms to harness the legitimacy and resource benefits of government ownership, as envisaged under the Privatisation Act (2023).

Managers should leverage government connections to access resources and markets while ensuring that political considerations do not overshadow commercial objectives.

Regulators and investors should monitor firm size dynamics and promote operational efficiency, especially in larger state-owned firms where bureaucracy may constrain performance.

9 Further Research

Future studies could extend this research by incorporating qualitative evidence from managers and policymakers to understand the mechanisms through which government ownership influences performance. Comparative studies across African exchanges would also provide broader generalisability. Additionally, research could examine the moderating role of corporate governance quality on the ownership–performance relationship.

REFERENCES