The Effect of Regulatory Compliance and Voluntary Disclosure on Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

Various theories have indicated that the objectives pursued by shareholders and corporate managers tend to differ and are contradictory with regards to their individual interests and this has given rise to corporate governance which is said to minimize the spill over. Regulatory compliance and voluntary disclosure are two components of corporate governance that can help reduce information asymmetry between parties and consequently improve a firm’s stock returns. The aim of this study was to ascertain the effect of regulatory compliance and voluntary disclosure on stock returns of firms quoted at the NSE. The population for the study was all the 64 companies quoted at the NSE. The independent variables for the study were regulatory compliance as measured by a regulatory compliance index, voluntary

disclosure as measured by a voluntary disclosure index, capital structure as measured by debt ratio, liquidity measured by current ratio and firm size as measured by the natural logarithm of total assets. Stock return was the dependent variable and was measured by change in share price plus any dividend issued during the period. Secondary data was collected over a five 2 year time frame (January 2016 to December 2017) annually. The descriptive cross-sectional research design was employed for the study and the relationship between variables established using multiple linear regression analysis. Data analysis was undertaken using the SPSS software. The results of the study produced R-square value of 0.267 which means that about 26.7 percent of the variation in stock returns of firms quoted at the NSE can be explained by the five selected independent variables while 73.3 percent in the variation in stock returns of firms listed at the NSE was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with stock returns of firms listed at the NSE (R=0.516). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the association between the selected variables. The findings also showed that regulatory compliance produced positive and statistically significant values for this study. Capital structure produced negative but statistically insignificant values while voluntary disclosure, firm size and liquidity produced positive but statistically insignificant values for this study. This study recommends that listed firms should adhere with set regulations as regulatory compliance has a significant positive effect on stock returns of listed firms.