The relationship between corporate governance mechanisms and performance of firms quoted on the Nairobi Stock Exchange
Abstract
The objectives of the study were to investigate the relationship between corporate governance
mechanisms and firm performance in Kenyan publicly quoted firms and also to document the
corporate governance mechanisms present in these companies. In order to achieve these objectives,
both descriptive statistics analysis and cross sectional multiple regression analysis are done for 44
companies quoted on the Nairobi stock exchange in the period of 1999-2003. The following major
conclusions are drawn from the study.
The average board size of Kenyan listed firm is 8 and non-executives hold a significantly larger
percentage of board seats (76%). In addition, 0.13% of the sample population have C.E.O.
duality. With regard to ownership, the five largest shareholders in Kenyan listed firms account for
70% of the outstanding shares on average while Institutional investors, individual investors, foreign
investors, financial institutions, and the state control 51%, 22%, 26%, 10% and 3.4% of the
outstanding shares respectively.
Empirical results of the study show that both board size and c.E.O. duality have significant
relationships only with stock market returns (R2T). They have a positive and negative relationship
respectively. No measure of firm performance has a significant relationship with the percentage of
non-executive board members. With regard to ownership structure, state ownership is negatively
related to return on assets (ROA) but has no significant relationship with RET and Tobin's Q ratio.
State share ownership seems to lead to inefficiency and low profitability. Financial institutions
ownership is positively related to Tobin's Q but has no significant relationship with RET and ROA.
This supports the hypothesis that financial institutions have the skills and resources to monitor
managers.
Ownership by top 5 shareholders, which depicts ownership concentration, is not significantly related
to any of the performance measures. Also ownership by individuals and institutional investors are
not significantly related to. any of the performance measures. With regard to control variables, the use
of leverage has a significant negative relationship only with ROA, While firm size is related positively
only with RET.
The fact that different performance measures exhibit different results with various corporate
governance mechanisms confirm why debate has ensued on which of the measures; stock market or
accounting is "best" for studies about corporate governance without consensus.
Citation
MBASponsorhip
University of NairobiPublisher
University of Nairobi School of Business, College of Humanities and Social Sciences