Corporate Governance and Quality of Financial Reporting of Commercial Banks Listed at the Nairobi Securities Exchange, Kenya
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Date
2025-05
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Publisher
Kenyatta University
Abstract
In Kenya, the banking sector is heavily regulated to safeguard investor trust, given the critical economic function of banks. However, research indicates that even healthy organisations operating financially secure have experienced problems related to their financial strategies. Several banking institutions in Kenya have experienced failures over time, largely attributed to financial misappropriation linked to substandard financial reporting. Consequently, those listed must incur substantial agency costs to mitigate information asymmetry and counteract the self-serving behaviours of managers. The Capital Markets Authority of Kenya introduced the 2015 Corporate Governance Code to replace the 2002 guidelines, aiming to align with global best practices in response to changing business environments. The study purposed to assess the effect of corporate governance on the quality of financial reporting of commercial banks quoted at the Nairobi Securities Exchange. The research’s main goal was to demonstrate how board independence, board expertise, external audit tenure and board gender diversity affected the quality of financial reporting among commercial banks quoted at the Nairobi Securities Exchange. This study further examined the moderating effect of bank size on the relationship between the variables. Six theories agency, positive accounting, stakeholder, upper echelons, resource dependence and signalling guided the study. Positivist research philosophy and explanatory research design were deployed. The target population was all eleven listed commercial banks from 2017 to 2021. Data for the analysis was collected from audited annual reports using a document review guide and analysed through both descriptive and inferential statistics. Descriptive analysis included the calculation of mean, standard deviation and ratios. A panel regression model was used to investigate the relationships between variables. Diagnostic tests conducted included tests for normality, multicollinearity, panel unit root, autocorrelation, heteroscedasticity and random or fixed effects. Panel data was analysed using the random effects model, as Hausman’s test found it consistent. The results revealed that board independence had a significant influence on the quality of financial reporting. However, board expertise, external audit tenure and board gender diversity revealed positive but insignificant influence on the quality of financial reporting of commercial banks quoted at the Nairobi Securities Exchange. The study further observed that bank size moderated the relationship between corporate governance and the quality of financial reporting of commercial banks quoted in Kenya. This study recommends that board independence among the non-executive directors be enhanced to improve the quality of financial reporting of listed commercial banks in Kenya. Further, the study recommends the need to re-evaluate the role of board independence as banks expand, given its critical influence on maintaining high-quality financial reporting.
Description
A Thesis Submitted to School of Business, Economics And Tourism in Partial Fulfillment of the Requirement For the Award of Degree of Master of Science in Finance of Kenyatta University, May 2025.
Supervisors
1. Daniel Makori
2. Charity Njoka