Effect of Corporate Governance on Earnings Management of Manufacturing and Allied Firms Listed at the Nairobi Securities Exchange

Abstract

To come up with solutions to financial scandals, there is a need to adopt practices that would protect and encourage transparency of reported information and to mitigate conflicts of interests. This will ensure auditors remain independent so as to protect investors interests. An existence of a fragile governance structure creates a chance for managers to engage in behaviours to fulfil their personal interests thus, eventually contributing to poor quality of reported earnings. This research set to determine how corporate governance influences earnings management of manufacturing and allied firms that are listed at the NSE. All 9 manufacturing and allied firms listed formed population of this work. Independent variables in this research were corporate governance operationalized as the size of the board members, independence of the board and board activity. Control variables wereprofitability as measured by return on equity, firm size as measured by natural logarithm of total assets and financial leverage measured by the ratio of total debt to total assets in an year. The response variable was earnings management as measured by discretionary accruals. A five-year period, January 2014 and December 2018, was studied through gathering of secondary data. Descriptive research design method was employed while multiple linear regressions model was applied in analysis of the association between the variables. The data was analyzed by use of SPSS version 22. An R-Square value of 0.924 was produced from the study results which meant that a large percentage, 92.4%, of earnings management of manufacturing and allied firms that are listed at the NSE can be explained by the six predictor variables as 7.6% of disparity of earnings management was related to variables that were not part of this study. Findings of ANOVA highlight how F was important at the 5% level, showing p=0.000. Henceforth, this case showed that the model was appropriate in explanation of the correlations between the differing variables. In addition, it was revealed that board independence had a negative and statistically significant influence on earnings management while firm size and financial leverage had a positive and statistically significant influence on earnings management. Board size, board activity and profitability produced not statistically significant values for this research work. This research recommends that policy makers should develop policies aimed at making boards more independent, because this has a statistically significant influence on earnings management among manufacturing and allied firms listed at the NSE