The effect of corporate governance on earnings management of companies listed at the Nairobi securities exchange
Abstract
Following the spate of well-publish corporate scandals that took its toll with the collapse of once
the prestigious companies such as Enron and Worldcom reiterated the need for an investigation into
the quality of financial reports and increased the clamoring for a better governance mechanism
worldwide. The aim of this research was to determine the effect of corporate governance on
earnings management of companies listed at NSE in Kenya. The corporate governance variables
used in the study are board size, board independence, audit committee independence and CEO
shares while discretionary accrual was used to proxy for earnings management. Sample sizes of
thirty (30) companies were selected from listed companies at NSE for the period 2009 to 2013. This
gives us a total of 150 company years/data observations. Regression Analysis was used in the
analysis of data and result interpreted based on the R-squared R-squared, adjusted R-squared,
coefficients of the independent variables and their p-values.
From the findings, the study found that a unit increase in board size will cause an increase in
earnings management and statistically significant , further a unit increase in board independence
will lead to a decrease in earnings management and statistically significant, a unit increase in audit
committee independence will lead to a decrease in earnings management and statistically not
significant, a unit increase in CEO shares will lead to an increase in earnings management but
statistically not significant and a unit increase in Firm Size will further lead to a decrease in
earnings management and statistically significant. The study concluded that earnings management
is negatively related to board independence. The study also concluded, that board independence is
negatively related to earnings management. The study recommends the need for effective corporate
governance practice at board selection level of the companies quoted at NSE. Re-examining the
criteria used in selection of directors in the companies and ensure that corporate boards are more
independent. This will reduce the earnings management and will ensure that the directors are
accountable to the shareholders with a ripple effect of improving investor confidence.
Publisher
University of Nairobi