Effect of Corporate Governance Practices on Financial Distress Among Listed Firms at Nairobi Securities Exchange

Abstract

The role of corporate governance in enhancing financial performance and reducing financial distress has been termed as significant. Good corporate governance is expected to reduce financial distress but poor corporate governance practices leads to higher probability of financial distress. As result of good corporate governance a firm is shielded from susceptibility to future financial distress. Corporate governance of the firms listed at NSE has been in the lime light in the recent years where managers and directors have been accused of poor corporate governance resulting to financial distress among listed firms. The financial distress facing listed firms in Kenya such as Uchumi Supermarkets, CMC motors and Mumias Sugar for instance was blamed on poor governance. Furthermore, the publicized huge losses and numerous unresolved disputes resulting to court cases by Kenya Airways and Kenol Kobil have also thrust corporate governance practices into the spotlight. Corporate governance of firms listed at NSE is hence a topic of concern. The study hence sought to establish the effect of corporate governance practices on financial distress among listed firms at Nairobi Securities Exchange with a focus on number of non-executive directors, board size, board gender diversity, ownership concentration and the control effect of net profit and capital structure. The study used Agency theory, Stakeholder theory, Stewardship theory and Transaction theory in building a theoretical argument. The study employed a descriptive research design. The target population of the study was the listed firms at the NSE by the year ending December 2016. Altman Z score model was used to score the financial distress. Applying ordinary least square regression model, the study established that net profit has a negative significant effect on financial distress, management concentration and financial distress are negatively and significantly related, non-executive board members has a negative and significant effect on financial distress and board size has a positive and significant effect on financial distress and board diversity has a positive but not significant effect on financial distress. Capital structure on the other hand has a positive but insignificant effect on financial distress of firms listed.