Portfolio Diversification and Firm Value of Investment Companies Listed at the Nairobi Securities Exchange

Abstract

The effective management of firms is dependent on how well investment decisions are made to enhance the value of firms. As such the research sought to investigate how portfolio diversification affects firm value of investment firms listed at the Nairobi Securities Exchange. Variables used to measure portfolio diversification were bonds, equity securities, and real estate investments, whereas firm value was the dependent variable and firm size, the moderating variable. The modern portfolio theory, resource-based view and the agency theory provided the theoretical framework on which the study was based. Both a longitudinal study technique and a quantitative research design were used. From 2013 to 2022, financial information from five investment companies—Centum Investment Co Plc, Home Afrika Ltd, Kurwitu Ventures Ltd, Olympia Capital Holdings Ltd, and Trans-Century Plc—listed on the Nairobi Securities Exchange (NSE) was used. Normality, homoscedasticity, auto-correlation, multicollinearity, stationarity, and linearity were the diagnostic tests that were performed. These diagnostic tests were designed to ensure the robustness of the panel data model. Excel 2016 was used to enter the data, which was then exported to STATA version 14 for analysis. The variables of interest's mean, mode, median, variance, standard deviation, kurtosis, skewness, minimum, and maximum were all included in descriptive statistics. All of the independent factors, including the moderating variable, showed a positive association with the dependent variable, according to the correlation matrix analysis. A panel regression model with fixed effects was used. The impact of investing in bonds and equity securities on firm value was negligible. Firm value was significantly impacted by real estate investments, suggesting that a unit rise in the value of real estate assets resulted in a unit increase in company value. It was discovered that firm size had a considerable impact; in other words, there was an inverse relationship between firm size and firm value, meaning that for every unit increase in firm size, the firm value decreased by -1.2877 units. The findings therefore led to different conclusions regarding the study variables. Bonds investments’ insignificant effect on firm value implied that investment firms should be cautious when investing in bonds due to interest rates and maturity sensitivity. Other assets classes are more ideal than equity securities investments, if investments firms want to improve their firm’s value. Real estate had significant effect on firm value, and therefore investment companies in Kenya can maximize their firms’ value through successful real estate investments. Nonetheless, large firms should be cautious as firm size weakens any positive relationship between portfolio diversification and firm value. Several recommendations were made. Investment companies should adopt investment strategies that are geared towards investment in real estate assets. Investors and investment companies should consider interest volatility and the maturity period of bonds when investing in bonds. The study’s limitations included need to apply caution and high precision as secondary data used which is prone to errors of commission and omission. The study also used data from 2020 and 2021, periods when there was the Coronavirus pandemic, which ultimately affected investment operations. Future research should focus on capturing data from all investment firm in Kenya, to enhance generalizability of data. Both primary and secondary data should be used in future studies to ensure that all relevant data is collected and analyze. Keywords; Investment Companies, Bonds, Real Estate, Equity Securities, Bonds, Firm Value, Firm Size