Effect of Earnings Quality on Market Value of Companies Listed at the Nairobi Securities Exchange, Kenya

Abstract

This study sought to determine the effect of earnings quality on market value of companies listed at the Nairobi Securities Exchange. A descriptive research design was used. The population of the study comprised of the companies listed at the Nairobi Securities Exchange from 2009 to 2019. A sample of 40 companies was selected using simple random sampling. The study used secondary data obtained from the Nairobi Securities Exchange handbook. Data was summarized using descriptive statistics. Correlation analysis was used to evaluate the relationship between the variables. Multiple linear regression was used to measure effect of accruals quality, earnings persistence, firm size and financial leverage on market value. The study found that market value and accrual quality were weakly positively correlated and the correlation was significant at 5% level of significance. Market value and earning persistence had a weak positive correlation with the correlation being significant at the 5% level. Market value and firm size had a weak positive correlation. The correlation was significant at 5% level. The correlation between market value and financial leverage was positive but weak. The correlation was significant at 5% level. The result of regression showed that accrual quality had a positive effect on market value of companies listed at the Nairobi Securities Exchange. The effect was significant at the 5% level of significance. Earnings persistence had a positive effect on market value of companies. The effect was significant at 5% level of significance. Firm size was found to have a positive effect on market value and was significant at 5% level of significance. Financial leverage was also found to have a positive effect on market value and the effect was significant at 5% level of significance. The adjusted coefficient of determination was obtained as 31.2% indicating that variation in accrual quality, earnings persistence, firm size and financial leverage explained 31.2% of the variation in market value. The study concluded that high quality accruals have the effect of enhancing the market value of companies listed at the Nairobi Securities Exchange. Persistent earnings also have value enhancing effects for companies listed at the Nairobi Securities Exchange. In addition, the study concluded that larger firms at the Nairobi Securities Exchange have higher market value. Finally, it was concluded that financial leverage has the effect of increasing market value of companies listed at the Nairobi Securities Exchange. The study recommended that since accrual quality, earnings persistence, firm size and financial leverage had value enhancing effects, managers of companies listed at the Nairobi Securities Exchange should focus on improving the quality of accruals and earnings persistence, growing the size of the company and increasing leverage. Also, investors and investments analysts should pay attention to accrual quality, earnings persistence, firm size and financial leverage in evaluating companies for the purpose of investment. Further research may extend to evaluating other measures of earnings quality and consider the limit to financial leverage. Also accrual quality could be measured differently by focusing on operating cash flows.