The Effect of Corporate Governance on Earnings Management in Firms Listed at the Nairobi Securities Exchange in Kenya

Abstract

Earning management has been trending in the current financial market. The corporate governance has been utilized in ensuring that unsuspecting shareholders have different information. This is due to informational asymmetry. The research aimed at finding the effect of corporate governance on the earning management. The research optimized five predictor variables with firm size as the sixth being the control variable. The research found a significant association amid the predictors’ variables and the regressed variables. The postulated predictor variable explained 53% before controlling for firm size as stipulated by R-Square. After controlling for firm size they explained 68% of changes in the regressed variable meaning firm size alone explained 15% changes in EM. The research stipulated that the variables not indicated in this research accounted for 32%. This laid a crucial foundation in the analysis of earning management. The predictor variables analyzed showed that three repressor variables had positive association amid the earning management and corporate governance. The three variables were; board size, ownership concentration and Board Activity. However, two variables posted negative association, this include; Board independence, Audit Committee. Firm Size also had positive controlling effect on EM and corporate governance. The research postulated a great role of corporate governance on earning management. The research summarized that a unitary increase in each of the following; board size, ownership concentration and Board activity led to an increase in the earning management by 22.4%, 5.2% and 0.1% in that order all other factors constant when firm size is controlled. The research findings postulated that a unit increase in the audit committee led to a decrease in the earning management by 10%. The research further stated that an increase in the one unit of board independence led to a decrease in the earning management by 3.4% when all factors are kept constant and firm size is controlled. The multicollinearity test opined that the data was statistically significant. The researcher recommended further research on the same topic as well the use of first-hand information. The research further clarified the importance of CMA and NSE in stipulating policies to evade the far-reaching problems.