Effect of board diversity, firm profitability, and internal controls on financial reporting quality of companies listed at the Nairobi securities exchange in Kenya

Abstract

This paper established the joint effect of board diversity, firm profitability, and internal controls on the Financial Reporting Quality (FRQ) of the companies listed at the Nairobi Securities Exchange (NSE) in Kenya. The agency theory, Upper Echelons Theory (UET), and Resource Dependence Theory (RDT) informed the paper to elucidate the relations between the independent and dependent variables. This paper employed a multi-method quantitative research design and a deductive research methodology. The population comprised of 61 NSE-listed companies. Ultimately, 305 firm-year data of 61 firms listed in NSE between 2014 and 2018 were analyzed. Panel data was analyzed using the fixed effects model and the Hausman test found it consistent. The findings revealed that board diversity, firm profitability, and internal controls jointly significantly predict the FRQ of NSE-listed enterprises in Kenya. Additionally, the study revealed that FRQ is significantly predicted by the average age of directors (β = 0.856, p<0.05), board gender (β =1.201, p <0.05), and board independence (β = -1.685, p < 0.05) but insignificantly predicted by the foreign board members (β = 0.330, p>0.05), board qualification (β = 0.861, p>0.05), firm profitability (β= - 0.058, p > 0.05), and internal controls (β = 0.041, p > 0.05). Moreover, board independence negatively relates to FRQ. The paper recommends the need for NSE-listed firms to consider people with more experience and gender diversity while limiting the number of independent board members when constituting boards to improve the quality of financial reports.