Effects of Corporate Governance Practices on Financial Performance of Stockbrokers in the Kenyan Capital Market

Abstract

This research examined the relationship between corporate governance mechanisms (board in board composition, chief executive status and internal audit committee) and two finance performance measures (return on equity, ROE, and profit margin, PM), of a sample of ninety NSE stockbrokerage firms for a period of 2005-2009.

The motivation of the study was due financial scandals around the world and the recent collapse of major financial institutions in USA, South East Asia, Europe and Kenya that shook investors' faith in the capital markets. Kenya, the collapse and placement under statutory management of some NSE's stockbroker such as Francis Thuo, Nyagah Stockbrokers and Discount Securities, by Capital Mark Authority of Kenya (CMA) raised questions on corporate governance practices in the Kenya Capital Market and eroded investor confidence in the market. Therefore, the purpose of the study was to establish the effects of corporate governance practices on financial performance stockbrokers in the Kenyan capital market. Data was collected through questionnaires and annual reports of NSE stockbrokers and the response rate from questionnaires was 84.2%.

The study used multiple regressions method for analysis and Ordinary Least Squares (OLS) as method of estimation. Using panel methodology and OLS as a method of estimation, the resu1 provide evidence of a positive significant relationship between ROE and board size as well chief executive status. The results further reveal a positive significant relationship between Pl and chief executive status. The implication of this is that the board size should be limited to sizeable limit and that the posts of the chief executive and the board chair should be occupied t different persons.

Though the corporate governance practices in stockbrokerage fraternity has shown some improvement, there is need to enhance it for continued growth of investor confidence in the Kenyan capital market. It is therefore recommended that strategic training for board member and senior managers in the area of corporate governance be intensified to promote goo corporate governance practices in these institutions.