Profitability and Financial Growth of Cross Listed Firms at Nairobi Securities Exchange

Abstract

Purpose: Cross listing plays a significant role in the development of emerging capital markets through improved access to foreign capital, improved stock liquidity, access to new markets, and enhanced brand visibility which collectively contribute to improved financial growth for cross listed firms. The purpose of the study was to establish the financial effect of cross listing event by examining whether the changes in profitability had a statistically significant effect on the financial growth of cross listed firms at Nairobi Securities Exchange. Methodology: The study adopted the event study methodology to undertake an impact analysis of the financial effect of cross listing focusing on a census survey of eight firms primarily listed at Nairobi Securities Exchange and cross listed in other East African Securities Exchanges. The scope of the study entailed cross listings that took place between 2000 and 2015. The study performed the classical tests of hypothesis using the paired t-test and variance-comparison test and inferential statistics using two-way fixed effects panel regression model. Findings: The study established that cross listing had a statistically significant effect on the financial performance of the firms primarily listed at Nairobi Securities Exchange. Further, the study findings indicate that the observed changes in liquidity, profitability, operational efficiency, leverage, and firm valuation had a statistically significant effect on the financial growth of the cross-listed firms that was sustained up to five years post cross listing. Unique Contribution to Theory, Practice and Policy: The study supplemented the static trade-off theory which posits that a firm’s optimal capital structure is attained by creating a trade-off between costs and benefits of debt or equity financing, hence providing a better understanding of a firm’s financing decisions. Further, the study augmented the pecking order theory which postulates that a firm maintains an optimal capital structure through establishing a hierarchical preference for cheaper sources of financing including retained earnings, debt, and equity. Consequently, the study complements the existing body of literature on maintaining an optimal capital structure and enhancing financial growth through regional cross listings