Relationship between Corporate Governance Quality and Financial Performance of Manufacturing Firms Listed at the Nairobi Securities Exchange
Abstract
There has been renewed interest in the relationship between corporate governance and financial performance of modern corporations. This study, therefore, sought to investigate the relationship between corporate governance quality and financial performance of manufacturing firms listed at the Nairobi Securities Exchange. The study examined the relationship between board independence, board size, chief executive officer duality, frequency of board meetings, and a comprehensive corporate governance index and financial performance. The study adopted longitudinal research design. Data for independent variables were collected from published corporate governance reports while data for control variables were collected from the financial reports. The data was analyzed using descriptive statistics, correlation analysis and multiple regression analysis. The study found that corporate governance quality is significantly related with firm performance. Specifically, the study found that that board size and a comprehensive corporate governance index computed by Cytonn Investments had a positive and significant relationship with financial performance. The study recommends that it is important for manufacturing companies to increase the quality of their boards of directors. This is because high quality boards could help in enhancing the financial performance. The study recommends that the manufacturing firms should fully comply with the code of corporate governance practices for issuers of securities for companies listed at the Nairobi Securities Exchange.
Keywords: Board independence, board size, CEO duality, board meetings, corporate governance index, financial performance, manufacturing firms, Kenya.
References
Abor, J., & Biekpe, N. (2007). Corporate governance, ownership structure and performance of SMEs in Ghana: implications for financing opportunities. Corporate Governance: The international journal of business in society, 7(3), 288-300.
Adegbemi, O. B., Donald, O. I., & Ismail, F.O. (2012). Corporate governance and bank performance: A pooled study of selected banks in Nigeria. European Scientific Journal, 8(28), 45-123.
Aguilera, R.V., Filatotchev, I., Gospel, H., & Jackson, G. (2008). An organizational approach to comparative corporate governance: Costs, contingencies, and complementarities. Organization Science, 19(3), 475-492.
Agyris, C. (1973). Personality and organization theory revisited. Administrative Science Quarterly, 18(2), 141-167.
Alchian, A. A., & Demsetz, H. (1972). Production, information costs, and economic organization. The American Economic Review, 62(5), 777-795.
Ammann, M., Oesch, D., & Schmid, M. M. (2011). Corporate governance and firm value: International evidence. Journal of Empirical Finance, 18(1), 36-55.
Argenti, J. (1993). Your Organization: What is it for? McGraw Hill, New York.
Balasubramanian, N., Black, B. S., & Khanna, V. (2010). The relation between firm-level corporate governance and market value: A case study for India. Emerging Markets Review,2(11), 319-340.
Brown, L. D., & Caylor, M. L. (2014). Corporate governance and firm valuation. Journal of Accounting and Public Policy, 5(25), 409-434.
Brudney, V. (1985). Corporate governance, agency costs, and the rhetoric of contract. Columbia Law Review, 85(7), 1403-1444.
Chandler, G. N. (2010). Measuring the performance of emerging businesses: A validation study. Journal of Business Venturing, 8(5), 391-408.
Clarke, T. (2004). Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. London: Routledge Taylor and Francis Group.
Coombes, P., & Watson, M. (2012). New institutional investor survey puts price tag on corporate governance. Directorship, 26(8), 1-3.
Daily, C.M., & Dalton, D.R. (2003). The relationship between governance structure and corporate performance in entrepreneurial firms. Journal of Business Venturing, 7(5), 375- 86.
Davis, J.H., Schoorman, F.D., & Donaldson, L. (1997). Toward a stewardship theory of management. Academy of Management Review,15(22), 20-47.
Demsetz, H., & Villalonga, B. (2011). Ownership structure and corporate performance. Journal of Corporate Finance, 7(3), 209-233.
Donaldson, T.,& Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence and implications. Academy of Management Review,20(1), 69-95.
Erkens, D., Hung, M., & Matos, P. (2010). Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide. Economics and Finance Journal, 7(3), 345-377.
Esman, M. N. (2013). The effect of governance on performance of commercial banks in Kenya: a panel study. Corporate Governance. The International Journal of Business in Society, 13(3), 236-248.
Fama, E.F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288-307.
Handy, C. (1991). What is a Company for? RSA Journal, 2(4), 23-56.
Hashim, H. A., & Devi, S. (2012). Board characteristics, ownership structure and earnings quality: Malaysian evidence. Research in Accounting in Emerging Economies, 8(97), 97- 123.
Heentigala, K., & Armstrong, A. (2011). The Impact of Corporate Governance on for Performance in Unstable Economic and Political Environment: Evidence from Sri-Lanka. Economic Journal, 11(9), 122-134.
Ho, C. K. (2015). Corporate governance and corporate competitiveness: an international analysis. Corporate Governance. An International Governance Review, 13(2), 211-253.
Kimosop, K. (2011). The relationship between corporate governance and financial performance of insurance companies in Kenya. Corporate Governance Journal, 9(2), 112-143.
Kirkpatrick, G. (2012). The Corporate Governance Lessons from the Financial Crisis. OECD Steering Group on Corporate Governance. Journal of finance, 3(2), 42-96.
Korac-Kakabadse, N., Kakabadse, A. K., & Kouzmin, A. (2011). Board Governance and Company Performance: Any Correlations? Corporate Governance, 1(1), 24-30.
Love, I., & Rachinsky, A. (2017). Corporate governance, ownership and bank performance in emerging markets: Evidence from Russia and Ukraine. Journal of Management, 11(2), 22-24.
Mashayekhi, B., & Bazaz, M. S. (2008). Corporate governance and firm performance in Iran. University of Tehran and Oakland University, Iran. Economics and Finance Journal, 7(5), 121-132.
Mayer, F. (2017). Corporate governance, competition, and performance’’, in Deakin, S. and Hughes, A. (Eds), Enterprise and Community. Oxford: Blackwell Publishers.
Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 4(3), 89-128.
Muth, M. M., & Donaldson, L. (1998). Stewardship Theory and Board Structure: A Contingency Approach. Corporate Governance: An International Review, 6(1), 5-28.
Ongore, V. O., & Owoko, P. (2011). Effects of selected corporate governance characteristics on firm performance: Empirical evidence from Kenya. International Journal of Economics and Financial Issues, 1(3), 99.
Padilla, A. (2002). Can agency theory justify the regulation of insider trading? Quarterly Journal of Austrian Economics, 5(1), 3-38.
Shleifer, A., & Vishny, R.W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783.
Shuk, C. Y. (2013). How do the level of corporate governance and its improvements affect the performance and investment risk of Hong Kong Property Industry? Financial Risk Management Journal, 7(12), 127-212.
Spanos, L. J. (2015). Corporate governance in Greece: developments and policy implications. Corporate Governance: The International Journal of Business in Society, 5(1), 15-30.
Key, S. (1999). Toward a new theory of the firm: a critique of stakeholder theory. Management Decision, 37(4), 317-328.
Van Essen, M. (2011). An institution-based view of ownership. Rotterdam: Erasmus University Rotterdam.
Varshney, P., Kaul, V. K., & Vasal, V. K. (2013). Corporate governance mechanisms and firm performance: a study of select Indian firms. Afro-Asian Journal of Finance and Accounting, 3(4), 341-395.
Walker, K. (2010). A systematic review of the corporate reputation literature: Definition, measurement, and theory. Corporate reputation review, 12(4), 357-387.
