Effect of Board Diversity on Earnings Management in Listed Manufacturing and Allied Companies in Kenya

Abstract

Board diversity as an aspect of corporate governance has gained traction among researchers and practitioners of corporate finance. Although much research has been devoted to corporate governance, few studies exist on board diversity especially on its relationship with earnings management. The current study sought to examine the effect of board diversity on earnings management among listed manufacturing firms at the Nairobi Securities Exchange. The study was under pinned by agency theory, stewardship theory and the positive accounting theory. The study adopted descriptive research design. Study population consisted of nine listed manufacturing firms in Nairobi securities exchange as at 31 December 2017. This study used secondary data that was retrieved from the annual reports of all the listed manufacturing companies in the NSE. Information about board diversity to be collected includes number of directors, proportion of male to female directors, proportion foreign to local directors, term structure of the board. Collected information included net income, operations cash flow, accounts receivables and net property of all listed manufacturing companies. Data that was used was collected for a period of seven years from 2011-2017. The collected data was sorted and classified ready for use. Data was entered into excel and exported to STATA and analysed using descriptive and regression analysis. The researcher used regression analysis to examine the relationship between the study variables. The objectives were examined at 95% confidence level while employing student t test. The data was subjected to diagnostic tests to evaluate conformity with multiple regression model assumptions thus ensuring validity of the results. The study employed normality, heteroscedasticity, multicollinearity, serial correlation and unit root diagnostic tests. The results established that Gender diversity had a statistically significant negative effect on earnings management of listed manufacturing firms in Kenya (β1 = -1.13855, p = 0.020 < α = 0.05). Age diversity had a nonstatistically significant effect on earnings management (β2 = -.7016052, p = 0.486 > α = 0.05), Board independence had a nonstatistically significant effect on earnings management(β3= 1.2038, p = 0.295 > α = 0.05, Nationality had a statistically significant effect on earnings management (β4 = 2.460476, p = 0.038 < α = 0.05) and Firm size had a statistically significant effect on earnings management (β5 = 1.010958, p = 0.001 < α = 0.05). The study recommends to management of listed manufacturing to aggressively adopt more diverse boards especially on gender since it is associated with reduction in earnings management. The companies’ shareholders should understand the benefit of having gender diverse boards. Secondly, the study recommends to policy makers especially Capital Market Authority to continue enforcing the rules concerning diversity with focus on gender and nationality to minimise the mass failure of firms.