The Relationship Between Corporate Governance Practices and Earnings Management of Companies Listed in the Nairobi Securities Exchange
Abstract
Earnings management is a strategy used by the management of a company to deliberately
manipulate the company's earnings so that the figures match a pre-
determined target. This
practice is carried out for the purpose of income smoothing. In Kenya, cases where managers
and directors have been accused of poor corporate governance resulting in corporate
scandals include, the collapse of the Euro Bank in 2004, the placement of Uchumi
Supermarkets under receivership in 2004 due to mismanagement, the near collapse of UngaGroup, National Bank of Kenya and the more recent Board ro
om wrangles and the discovery
of secret overseas bank accounts for siphoning company money by some directors at CMC
Motors. The purpose of the study was to determine the relationship between corporate
governance practices and earnings management among companies listed in the Nairobi
Securities Exchange. The study adopted descriptive research design. The population under
investigation was all the 63 companies listed in the N.S.E. The sample population consisted
of 58 companies that had been actively trading
at the NSE between January 2010 and
December 2013. The study used secondary quantitative data. Descriptive statistics was used
(mean scores, standard deviations and percentages) to profile the extent and distribution of
various corporate governance practices. The data collected also employed linear regression
and correlation analysis to test the relationship between the dependent variable. Based on the
findings, the study found
that board size positively and significantly influenced the earnings
management
among companies listed in the Nairobi Securities Exchange.
In addition the
study also concluded that
board independence
negatively but significantly influenced the
earnings management among companies listed in the Nairobi Securities Exchange. The study
further revealed that
CEO Duality
positively and significantly influenced the earnings
management among companies listed in the Nairobi Securities Exchange although the effect
is moderate. The study also concludes that
ownership structure
negatively but significantly
influenced the earnings management among companies listed in the Nairobi Securities
Exchange. The monitoring power derived from the ownership structure results in a kind of
control exercised over the company and, particularly, over the top management team.
Market
regulators (or standard setters) and investors need to be aware of the different types of
earnings management. While opportunistic earnings management tends to mislead and hurt
investors, informative earnings management will, in fact, provide useful information through
signaling out managers’ private information about the firm’s future cash flows and earnings
potential. Rational investors should refer to different types of earnings management behaviors
and adjust their decisions accordingly.
The study recommended the need for effective
corporate governance practices at senior managerial level of quoted companies in Kenya to
contribute to reduced earnings management and hence improve on actual firm liquidity and
avert possible collapse of public organizations in Kenya.
Companies should consider
adopting conduct of regular Corporate Governance Audits and Evaluations.
The findings
reiterate the importance of contextualizing the issue under consideration in view of the legal
and institutional structures and processes in place rather than experimenting with some good
corporate governance practices used in other contexts
Publisher
University of Nairobi