Research Article, ISSN 2313-4747 (Print); ISSN 2313-4755 (Online); Prefix 10.18034 Copyright © CC-BY-NC 2014, Asian Business Consortium | AJTP Page 45 Government Ownership and Value of Listed Firms in Kenya: A Panel Data Evidence Fredrick Onyango Odhiambo 1* , Nixon Oduor Omindi 2 1 Senior Researcher, Department of Research Monitoring & Evaluations, Research Pro Solutions, P.O. Box 102609-00101 Nairobi, KENYA 2 Assurance Director, Department of Finance and Administration, Bukas Consultancy, P.O. Box 102558-00101 Nairobi, KENYA *E-mail for correspondence: ombako82@gmail.com Cell Phone: +254721977108 Received: Jun 1, 2015; Accepted: Jun 29, 2015; Published: Jul 24, 2015 Source of Support: Nil No Conflict of Interest: Declared ABSTRACT This study examines the relationship between government ownership and performance of listed firms on the Nairobi Securities Exchange. The quadratic term of government ownership is included in the model to test for the effect of increasing government ownership levels on performance. We use panel data techniques on 102 firm-year observations between 2003 and 2013 for all the listed firms in which the government directly owns some shares. We find no relationship between government ownership and performance at lower levels of government ownership. We find a negative relationship between government ownership and performance at higher levels of government ownership. We estimate, through differentiation of the Tobin’s Q model, that government ownership has a negative effect on performance when government ownership exceeds 41%. The study concludes that lower government ownership levels do not affect firm performance but as the ownership rises, government ownership has a detrimental effect on firm performance. We provide implications of these results for policy and practice. Keywords: Government Ownership, Performance, Nairobi Securities Exchange, Panel Data JEL Classifications Code: G34 INTRODUCTION Government ownership in firms has been a heated debate among scholars over the past decade just as much as has been the debate on the role of corporate governance in firm performance. Since the classical paper by Fama and Jensen (1983), effective corporate governance has been taunted over the years as a significant determinant of firm success. It reduces agency costs enabling firms to operate with maximum efficiency and achieve economies of scale. While scholars agree that institutional investors are important to firms as they contribute to effective monitoring (Choi et al. 2012), the government has been regarded as an unconventional institutional investor who differs from the rest of the institutional investors (Saleh et al. 2009). The government as an institutional investor has, therefore, been researched by some scholars to determine whether government ownership adds value to a firm or whether the presence of government ownership is detrimental to the performance of firms. Most of the studies on government ownership and performance relationship have not focused on Kenya as a developing country despite the importance of Kenya as a business hub for the East and Central Africa Region. The Government of Kenya has also been divesting its equity from corporate organisations it previously fully owned through privatisation of some of the parastatals such as Kenya Airways. Thus, the Government of Kenya has been actively selling off its shares to the public through initial public offers (IPOs) as was the case with Kenya Electricity Generating Company (KENGEN) and Kenya Re- insurance Company in 2006 and Safaricom in 2008, among other IPOs. Further, it has been diluting it control in most of the listed firms. For instance, the Government of Kenya initially had a 7.32% share ownership in Housing Finance (HF) [formally Housing Finance Corporation of Kenya (HFCK)], until 2007 when it loosened its grip to a paltry 3.66%. This scenario is replicated with government shareholding in Kenya Commercial Bank (KCB) and Mumias Sugar Ltd. In some cases, the Government of Kenya has increased its control. For example, the government now owns 50% of the shares in Kenya Power and Lighting Company (KPLC) up from a shareholding of 40.44% back in 2010. The same scenario is played out in KENGEN where the government now owns 70% of equity up from 40.42% in 2004. The government of Kenya is increasing its ownership in strategic industries like energy while divesting in other industries like banking and telecommunication.