Does Quality of Corporate Governance affect Financial Performance of listed firms in NSE, Kenya?
The goal of this paper is to analyze the effect of corporate governance efficiency on the financial performance of listed companies in the Nairobi Securities Exchange in Kenya between 2008 and 2017. The pooled OLS estimation approach was used to evaluate the hypothesis using panel data from 650 firm year observations. Results showed that both Disclosure and Related Party transactions are positively and substantially related to financial performance. Nonetheless, legal compliance was negatively and strongly linked to financial performance. The results provide empirical evidence that there is a link between CG quality and financial performance in Kenya. These findings are relevant for financial regulators such as CMA in their efforts to improve corporate governance practices in Kenya.
Ademola, O. J., Moses, O. I., & Ucheagwu, C. J. (2016). “Corporate Governance and Financial Performance of Selected Manufacturing Companies in Nigeria.” Corporate Governance, Vol. 2 (10).
Aguilera, R. V., & Cuervo-Cazurra, A. (2009). “Codes of good governance.” Corporate governance: an international review, Vol. 17 (3), pp. 376-387.
Aguilera, R. V., Desender, K. A., & Kabbach de Castro, L. R. (2012). “A bundle perspective to comparative corporate.” The SAGE handbook of corporate governance, pp. 379 - 405.
Aguilera, R. V., Desender, K., Bednar, M. K., & Lee, J. H. (2015). “Connecting the dots: Bringing external corporate governance into the corporate governance puzzle.” Academy of Management Annals, Vol. 9 (1), pp. 483-573.
Ahmad, S., Kodwani, D., & Upton, M. (2016). “Non-compliance, board structures and the performance of financial firms during crisis: UK Evidence.”
Akinkoye, E. Y., & Olasanmi, O. O. (2014). “Corporate governance practice and level of compliance among firms in Nigeria: Industry analysis.” Journal of Business and Retail Management Research, Vol. 9 (1).
Aksu, M., & Kosedag, A. (2006). “Transparency and disclosure scores and their determinants in the Istanbul Stock Exchange.” Corporate Governance: An International Review, Vol. 14 (4), pp. 277-296.
Albassam, W. (2014). “Corporate governance, voluntary disclosure and financial performance: ban empirical analysis of Saudi listed firms using a mixed-methods research design.”
Allegrini, M., & Greco, G. (2013). “Corporate boards, audit committees and voluntary disclosure: evidence from Italian Listed Companies.” Journal of Management and Governance, Vol. 17 (1), pp. 187–216.
Allen, F. (2005). “Corporate governance in emerging economies.” Oxford Review of Economic Policy, Vol. 21 (2), pp. 164-177.
ASX, (2003). “Principles of Good Corporate Governance and Best Practice Recommendations (ASX guidelines),” ASX Corporate Governance Council, Sydney.
Bauer, R., Guenster, N., & Otten, R. (2004). “Empirical evidence on corporate governance in Europe: The effect on stock returns, firm value and performance.” Journal of Asset management, Vol. 5 (2), pp. 91-104.
Bauwhede, H. V. (2009). “On the relation between corporate governance compliance and operating performance.” Accounting and Business Research, Vol. 39 (5), pp. 497-513.
Bebchuk, L. A., & Weisbach, M. S. (2010). “The state of corporate governance research.” The review of financial studies, Vol. 23 (3), pp. 939-961.
Bebchuk, L., Cohen, A., & Ferrell, A. (2008). “What matters in corporate governance?” The Review of financial studies, Vol. 22 (2), pp. 783-827.
Beeks, W. and Brown, P. (2006). “Do better-governed Australian firms make more informative disclosures?” Journal of Business Finance and Accounting, Vol. 33 (3-4), p. 422 – 450.
Bhagat, S., Bolton, B., & Romano, R. (2008). “The promise and peril of corporate governance indices.” Columbia Law Review, Vol. 108 (8), pp. 1803-1882.
Bhandari, V., & Arora, A. (2016). “Influence of Shareholders’ Activism and Firm-level Variables on the Corporate Governance Quality in India.” Indian Journal of Corporate Governance, Vol. 9 (2), pp. 122-147.
Bhatt, R.R. and Bhattacharya, S. (2015), “Do board characteristics impact firm performance? An agency and resource dependency theory perspective”, Asia-Pacific Journal of Management Research and Innovation, Vol. 11 (4), pp. 274-287.
Bin Tariq, Y. (2007). Quality of corporate governance and financial performance: An empirical analysis.
Black, B.S., Love, I. and Rachinsky, A. (2006b). “Corporate governance and firms’ market values: time series evidence from Russia.” Emerging Markets Review, Vol. 7 (4), pp. 361–379.
Blair, M. (1995). “Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century.” Washington, D.C., Brooking Press.
Bozec, R., & Bozec, Y. (2012). “The Use of Governance Indexes in the Governance-Performance Relationship Literature: International Evidence.” Canadian Journal of Administrative Sciences, Vol. 29 (1), pp. 79-98.
Brown, L. D., & Caylor, M. L. (2004). “Corporate governance study: the correlation between corporate governance and company performance.” Corporate Governance Study, Institutional Shareholder Services.
Buallay, A., Hamdan, A., & Zureigat, Q. (2017). “Corporate Governance and Firm Performance: Evidence from Saudi Arabia.” Australasian Accounting Business & Finance Journal, Vol.11 (1), pp. 78.
Byun, H. S., Lee, J. H., & Park, K. S. (2012). “How does product market competition interact with internal corporate governance? Evidence from the Korean economy.” Asia-Pacific Journal of Financial Studies, Vol. 41 (4), pp. 377-423.
Chalevas, C. G. (2011). “The effect of the mandatory adoption of corporate governance mechanisms on executive compensation.” The International Journal of Accounting, Vol. 46 (2), pp. 138-174.
Chang, J. H., Y. J. Cho, and H. H. Shin, (2007). “The change in corporate transparency of Korean firms after the Asian financial crisis: An analysis using analysts’ forecast data.” Corporate Governance – An International Review, Vol. 15, pp. 1144–1167.
Chen, J. C., & Roberts, R. W. (2010). “Toward a more coherent understanding of the organization society relationship: A theoretical consideration for social and environmental accounting research.” Journal of business ethics, Vol. 97 (4), pp. 651-665.
Cheung, Y. L., Connelly, J. T., Estanislao, J. P., Limpaphayom, P., Lu, T., & Utama, S. (2014). “Corporate Governance and Firm valuation in Asian emerging markets.” In Corporate Governance in Emerging Markets (pp. 27-53). Springer Berlin Heidelberg.
Cheung, Y. L., Connelly, J. T., Jiang, P., & Limpaphayom, P. (2011). “Does corporate governance predict future performance? Evidence from Hong Kong.” Financial Management, Vol. 40 (1), pp. 159-197.
Chi, L. C. (2009). “Do transparency and disclosure predict firm performance? Evidence from the Taiwan market.” Expert Systems with Applications, Vol. 36 (8), pp. 11198-11203.
Chiang, H. T., and L. J. He, (2010). “Board supervision capability and information transparency, Corporate Governance.” An International Review, Vol. 18, pp. 18–31.
CMA, (2015). “The Code Of Corporate Governance Practices For Issuers Of Securities To The Public.” The Capital Markets Act (Cap. 485a), Gazette Notice No. 1420. Kenya.
Dahawy, K. (2008). “Developing nations and corporate governance: The story of Egypt.” In The International Financial Corporation (IF), the Global Corporate Governance Forum. – 2009.
De Nicolò, G., Laeven, L., & Ueda, K. (2008). “Corporate governance quality: Trends and real effects.” Journal of Financial Intermediation, Vol. 17 (2), pp. 198-228.
Di Gloria, S., & Mantovani, G. M. (2017). “On the Shareholders’ Composition of the Company and the Governance Mechanisms of the Firm. Can this Contribute to the Firm Performance? (Including the Capacity to Attract Capital and Bank Allowances).”
Downs, D. H., Ooi, J. T., Wong, W. C., & Ong, S. E. (2016). “Related party transactions and firm value: evidence from property markets in Hong Kong, Malaysia and Singapore.” The Journal of Real Estate Finance and Economics, Vol. 52 (4), pp. 408-427.
Dzingai, I., & Fakoya, M. B. (2017). “Effect of Corporate Governance Structure on the Financial Performance of Johannesburg Stock Exchange (JSE)-Listed Mining Firms.” Sustainability, Vol. 9 (6), pp. 867.
Ebeling, P. C. (2015). “Corporate Governance of capital market-oriented real estate companies. Writings on the real estate economics and real estate law.” Regensburg: International Real Estate Business School, p. 163.
Edgley, R. C., Jones, M. J., & Solomon, J. F. (2010). “Stakeholder inclusivity in social and environmental report assurance.” Accounting, Auditing & Accountability Journal, Vol. 23 (4), pp. 532-557.
Elkelish, W. W. (2017). “IFRS related party transactions disclosure and firm valuation in the United Arab Emirates emerging market.” Journal of Accounting in Emerging Economies, Vol. 7 (2), pp. 173-189.
Farag, H., Mallin, C., & Ow-Yong, K. (2014). “Governance, ownership structure, and performance of entrepreneurial IPOs in AIM companies. Corporate Governance: An International Review, Vol. 22 (2), pp. 100-115.
Freeman, E. R., (1984). “Strategic Management: A stakeholder approach.” Boston: Pitman, 46.
Friedman, J., Johnson, E. S. & Mitton, T. (2003). “Propping and Tunneling.” Journal of Comparative Economics, Vol. 31 (4), pp. 732-750.
Fung, B., (2014). “The demand and need for transparency and disclosure in corporate governance.” Universal Journal of Management, Vol. 2 (2), pp. 72-80.
Ge, W., Drury, D. H., Fortin, S., Liu, F., & Tsang, D. (2010). “Value relevance of disclosed related party transactions.” Advances in Accounting, Vol. 26 (1), pp. 134-141.
Gompers, P., Ishii, J., & Metrick, A. (2003). “Corporate governance and equity prices.” The Quarterly Journal of Economics, Vol. 118 (1), pp. 107-155.
Gordon, E. A., Henry, E. & Palia, D. (2004). “Related party transactions and corporate governance.” Advances in Financial Economics, Vol. 9, pp. 1-28.
Gupta, K., Chandrasekhar, K., Tourani-Rad, A. (2013). “Is corporate governance relevant during the financial crisis?” Journal of International Financial Markets, Institutions and Money, Vol. (23), pp. 85–110.
Gupta, P., & Sharma, A. M. (2014). “A study of the impact of corporate governance practices on firm performance in Indian and South Korean companies.” Procedia-Social and Behavioral Sciences, Vol. (133), pp. 4-11.
Halter, M. V., De Arruda, M. C. C., & Halter, R. B. (2009). “Transparency to reduce corruption?” Journal of Business Ethics, Vol. 84, pp. 373-385.
Haniffa, R., & Hudaib, M. (2006). “Corporate governance structure and performance of Malaysian listed companies.” Journal of Business Finance & Accounting, Vol. 33 (7-8), pp. 1034-1062.
Heath, J., & Norman, W. (2004). “Stakeholder theory, corporate governance and public management: what can the history of state-run enterprises teach us in the post-Enron era?” Journal of Business Ethics, Vol. 53 (3), pp. 247-265.
Hermalin, B. E., & Weisbach, M. S. (2012). “Information Disclosure and Corporate Governance.” The Journal of Finance, Vol. 67 (1), pp. 195-233.
Hodgson, A., Lhaopadchan, S., and Buakes, S. (2011). “How informative is the Thai corporate governance index? A financial approach.” International Journal of Accounting & Information Management, Vol. 19 (1), pp. 53-79.
Htay, S. N. N., Ab Rashid, H. M., Adnan, M. A., & Meera, A. K. M. (2012). “Impact of corporate governance on social and environmental information disclosure of Malaysian listed banks: Panel data analysis.” Asian Journal of Finance & Accounting, Vol. 4 (1), pp. 1.
Jackling, B. and Johl, S. (2009). “Board Structure and Firm Performance: Evidence from India’s Top Companies.” Corporate Governance: An International Review, Vol. 17, No. 4, pp. 492-509.
Janney, J. J., G. Dess, and Forlani, V., (2009). “Glass houses? Market reactions to firms joining the UN global compact.” Journal of Business Ethics, Vol. 90, pp. 407–423.
Javaid, F., & Saboor, A. (2015). “Impact of Corporate Governance index on Firm Performance: evidence from Pakistani manufacturing sector.” Journal of Public Administration and Governance, Vol. 5 (2), pp. 1-21.
Jensen, M. C., & Meckling, W. H. (1976). “Theory of the firm: Managerial behavior, agency costs and ownership structure.” Journal of Financial Economics, Vol. 3 (4), pp. 305-360.
Kim, Y., Lee, J., & Yang, T. (2013). “Corporate transparency and firm performance: Evidence from venture firms listed on the Korean stock market.” Asia‐Pacific Journal of Financial Studies, Vol. 42 (4), pp. 653-688.
Klapper, L. F., & Love, I. (2004). “Corporate governance, investor protection, and performance in emerging markets.” Journal of Corporate Finance, Vol. 10 (5), pp. 703-728.
Kluijtmans, M. (2016). “Quality of non-compliance explanations related to corporate governance codes. Compliance with Corporate Governance Codes: differences between the Netherlands and Germany.”
Kohlbeck, M., & Mayhew, B. W. (2010). “Valuation of firms that disclose related party transactions.” Journal of Accounting and Public Policy, Vol. 29 (2), pp. 115-137.
Maina, F. G., & Sakwa, M. M. (2010). “Understanding Financial distress among listed firms in Nairobi stock exchange: A quantitative approach using the z-score Multi-Discriminant Financial analysis model.” Nairobi, KE: Jomo Kenyatta University of Agriculture and Technology.
Mang’unyi, E. E. (2011). “Ownership structure and Corporate Governance and its effects on performance: A case of selected Banks in Kenya.” International Journal of Business Administration, Vol. 2 (3), pp. 2.
Mangena, M., Tauringana, V., & Chamisa, E. (2012). “Corporate boards, ownership structure and firm performance in an environment of severe political and economic crisis.” British Journal of Management, Vol. 23 (S1).
McKinsey & Company, J. (2002). “Global Investor Opinion Survey: Key Findings.”
McNulty, T., Florackis, C. and Ormrod, P. (2013), ‘‘Boards of directors and financial risk during the credit crisis.’’ Corporate Governance: An International Review, Vol. 21 (1), pp. 58-78.
Mensah, S. (2002). “Corporate governance in Ghana: issues and challenges.” In African Capital Markets Conference.
Michelberger, K. (2016). “Corporate Governance Effects on Firm Performance: A Literature Review.” Regional Formation and Development Studies, Vol. 20 (3), pp. 84-95.
Mohd Ghazali, N. A. (2010). Corporate governance and voluntary disclosure in Malaysia. International Journal of Business Governance and Ethics, Vol. 5 (4), pp. 261-279.
Munir, S. A., & Gul, R. J. (2010). “Related party transactions, family firms and firm performance: some Malaysian evidence.”
Munisi, G., & Randøy, T. (2013). “Corporate governance and company performance across Sub-Saharan African countries.” Journal of Economics and Business, Vol. 70, pp. 92-110.
Mustaghni, B. (2012). “Influence of corporate governance on the success of companies: an investigation of listed companies in Germany. Peter Lang.”
Mwangi, L. W., Muathe, S. M. A., & Kosimbei, G. K. (2014). “Effect of Capital Structure and Performance of Non-Financial Companies Listed In the Nairobi Securities Exchange, Kenya.” Global Journal of Contemporary Research in Accounting, Auditing and Business Ethics, Vol. 1 (2), pp. 76-77.
Naushad, M., & Malik, S. A. (2015). “Corporate Governance and Bank Performance: A Study of Selected Banks in GCC Region.” Asian Social Science, Vol. 11 (9), pp. 226.
Nekhili, M., & Cherif, M. (2011). “Related parties transactions and firm's market value: the French case.” Review of Accounting and Finance, Vol. 10 (3), pp. 291-315.
Ntim, C. G. (2013). “An Integrated Corporate Governance Framework and Financial Performance in South African‐Listed Corporations.” South African Journal of Economics, Vol. 81 (3), pp. 373-392.
Ntim, C. G., Opong, K. K., & Danbolt, J. (2012b). “The relative value relevance of shareholder versus stakeholder corporate governance disclosure policy reforms in South Africa.” Corporate Governance: An International Review, Vol. 20 (1), pp. 84-105.
Ojeka, S. A., Mukoro, D. O., & Kanu, C. (2015). “Does Financial Reporting Disclosures Enhance Firm Financial Performance in the Nigerian Manufacturing Companies?” Mediterranean Journal of Social Sciences, Vol. 6 (6), pp. 332.
Okiro, K., Aduda, J., & Omoro, N. (2015). The effect of corporate governance and capital structure on performance of firms listed at the East African community securities exchange. European Scientific Journal, ESJ, 11(7).
Omboi, B. M. (2011). “Reasons for Low Listing by Agricultural Companies in the Bourse: A Case Study of DelMonte Limited Kenya.” Research Journal of Finance and Accounting, Vol. 2 (3), pp. 57-60.
Outa, E. R., & Waweru, N. M. (2016). “Corporate governance guidelines compliance and firm financial performance: Kenya listed companies.” Managerial Auditing Journal, Vol. 31 (8/9), pp. 891-914.
Rahman, R. A., & Salim, M. R. (2010). “Corporate governance in Malaysia: Theory, law, and context.” Sweet & Maxwell Asia.
Renders, A. Gaeremynck, A. and Sercu, P. (2010). “Corporate Governance Ratings and Company Performance: A Cross- European Study.” Corporate Governance: An International Review, Vol. 18 (2), pp. 87-106.
Roy, A., & Pal, A. M. (2017). “Corporate Governance Compliance, Governance Structures, and Firm Performance.” Indian Accounting Review, Vol. 21 (1).
Runhaar, H., and H. Lafferty, (2009). “Governing corporate social responsibility: An assessment of the contribution of the UN global compact to CSR strategies in the telecommunications industry.” Journal of Business Ethics, Vol. 84, pp. 479–495.
Sadka, G. (2004). “Financial reporting, growth and productivity: theory and international evidence.”
Samaha, K., Dahawy, K., Hussainey, K. & Stapleton, P., (2012). “The extent of corporate governance disclosure and its determinants in a developing market: The case of Egypt.” Advances in Accounting, Vol. 28 (1), pp. 168-178.
Sarkar, J., Sarkar, S., & Sen, K. (2012). “A corporate governance index for large listed companies in India.”
Schnyder, G. (2012). “Measuring Corporate Governance: Lessons from the 'Bundles Approach'.”
Shahwan, T. M. (2015). “The effects of corporate governance on financial performance and financial distress: evidence from Egypt.” Corporate Governance, Vol. 15 (5), pp. 641-662.
Shan, G. Y. (2009). “Related-party Disclosures in China: Influences of Factors Identified from Agency, Legitimacy and Signaling Theories.” Symposium SA, Adelaide.
Sharif, S. P., & Lai, M. M. (2015). “The effects of corporate disclosure practices on firm performance, risk and dividend policy.” International Journal of Disclosure and Governance, Vol. 12 (4), pp. 311-326.
Sheikh, N. A., & Karim, S. (2015). “Effects of Internal Governance Indicators on Performance of Commercial Banks in Pakistan.” Pakistan Journal of Social Sciences (PJSS), Vol. 35 (1).
Solomon, J. M. (2010). “New Governance, Preemptive Self-Regulation, and the Blurring of Boundaries in Regulatory Theory and Practice.”
Srairi, S. (2015). “Corporate Governance Disclosure Practices and Performance of Islamic Banks in GCC Countries.” Journal of Islamic Finance, Vol. 4 (2), pp. 1-17.
Sternberg, E. (1997). “The defects of stakeholder theory.” Corporate Governance: An International Review, Vol. 5 (1), pp. 3-10.
Stiglbauer, M. (2010). “Transparency & disclosure on corporate governance as a key factor of companies’ success: a simultaneous equations analysis for Germany.” Problems and Perspectives in Management, Vol. 8 (1), pp. 161-173.
Stiglbauer, M., & Velte, P. (2012). “Compliance with the German Corporate Governance Code and firm performance: a ten-year experience.” International Journal of Behavioural Accounting and Finance, Vol. 3 (1-2), pp. 5-23.
Tambunan, M. E., Siregar, H., Manurung, A. H., & Priyarsono, D. S. (2017). “Related Party Transactions and Firm Value in the Business Groups in the Indonesia Stock Exchange.” Journal of Applied Finance and Banking, Vol. 7 (3), pp. 1.
Tomšić, D. (2016). “Corporate Governance in Croatia; Quality Evaluation of Corporate Governance in Croatian Joint Stock Companies via SEECGAN Methodology;” Darko Tipurić (Ed.). Croatian International Relations Review, Vol. 21 (74), pp. 108-113.
Tse, T. (2011). “Shareholder and stakeholder theory: after the financial crisis.” Qualitative Research in Financial Markets, Vol. 3 (1), pp. 51-63.
Umobong, A. A. (2017). “Related party transactions and firms financial performance.” African Research Review, Vol. 11 (1), pp. 60-74.
Wahyudin, A. & Solikhah, B. (2017). “Corporate governance implementation rating in Indonesia and its effects on financial performance.” Corporate Governance: The International Journal of Business in Society, Vol. 17 (2), pp. 250-265.
Waweru, N. M., Kamau, R. G., & Uliana, E. (2011). “Audit committees and corporate governance in a developing country.” International Journal of Accounting, Auditing and Performance Evaluation, Vol. 7 (4), pp. 337-358.
Xiao, S., & Zhao, S. (2009). “How do agency costs affect firm value? Evidence from China.” Journal of Economic Literature.
Zaman, R., Arslan, M., & Sidiqui, M. A. (2015). “Corporate Governance and Firm Performance: The Role of Transparency & Disclosure in Banking Sector of Pakistan.”
Zheka, V. (2005). “Corporate governance, ownership structure and corporate efficiency: the case of performance in the GCC countries.” Journal of International Financial Markets, Institutions and Money, Vol. 46, pp. 98-115.