The link between compliance with corporate governance disclosure code, and firm performance for Kenyan firms.

Abstract

In 2002, The Capital Markets Authority (CMA) of Kenya issued the CMA guideline on Corporate Governance. Listed Companies are required to comply or give reasons for non-compliance with the “guideline”. Recent empirical work in developed markets investigating the link between compliance and performance of companies has documented weak or non-existent relationship. Furthermore the direction of causality of any relationship is debatable. Despite the prominence of the issue, academics and practitioners in developing markets have been niggardly in devoting commensurate efforts and attention on this issue with the result that few if any studies exist. We investigate the extent to which differences in the extent of firm level corporate governance reporting help to explain firm performance in a cross-section of companies listed at the Nairobi Stock Exchange. Constructing a broad Kenyan corporate governance index (KCGI) for Kenyan public firms, we document a positive relationship between governance practices and firm performance. This has implications for investing community if an investment strategy that bought high- KCGI firms and shorted low-KCGI firms would earn significant abnormal returns.