Effect of Financial reporting quality on performance of companies listed at the Nairobi Securities Exchange

Abstract

Companies with better quality of financial information are associated with subsequent higher performance in the literature. Currently, the many accounting scandals and financial crises that happened in numerous distinguished firms have undermined investors ‘trust concerning the financial reports and have introduced several criticisms about financial reporting quality (FRQ). Generally, Accountants are aware of the limitations of the information contained in the financial reports and have thus attempted to address this shortcoming by enhancing the scope of the generally accepted accounting principles and financial reporting standards. This study thus sought to ascertain the effect of financial reporting quality on financial performance of companies listed at the Nairobi Securities Exchange. Specifically, the study will sought to examine the effect of earnings qualityon financial performance of companies listed at the Nairobi Securities Exchange, establish the effect of accounting conservatism on financial performance of companies listed at the Nairobi Securities Exchange and determine the effect of accruals quality on financial performance of companies listed at the Nairobi Securities Exchange. Premised on Agency theory, Normative Approach Theory and Positive accounting theory, the current study targeted 68 firms listed at the NSE. With a response rate of 51.47% response rate, the study established that there was a statistically significant positive relationship between financial reporting quality and firm financial performance of firms listed at the NSE. The study therefore recommends that companies should ensure they enhance performance by having sound financial reporting mechanisms. Provisions for accruals especially leading to earnings management should be proscribed. The study also established a positive relationship between liquidity and financial performance calling for having sound working capital policies amongst the firms which enhances firm value. Given that the relationship between leverage and performance is negative, the foregoing study calls for establishment of optimal levels of gearing in the firms that enhance shareholder wealth. The study recommends further studies to increase the scope, the variables and eve explore other nonlinear regression models like the vector error correction models.