The relationship between financial reporting quality and firm value of companies listed at the Nairobi securities exchange

Abstract

The financial information that the market participant considers organizational issues as an important resource reduces information asymmetry existing amongst the investors, management, regulators amongst other stakeholder. Consequently, the effect of quality of FR on the successive performance of a company is one of the biggest questions that arise on how the market values this perceived higher quality. It has been established that organizations having quality financial information have a relatively higher subsequent value because the market positively evaluates those organizations that have a higher commitment of issuing quality financial information to the shareholders as well as other stakeholders, targeting reduction or avoidance of information asymmetries amongst the participants in the market The objective of this research is to establish the effect of financial reporting quality on the value of firms listed at the Nairobi Securities Exchange. It also aimed at reviewing the increasing body of theoretical and empirical studies that have endeavoured to examine the range of magnitude and effects of the financial reporting quality on the corporate value. The target population was all the listed firms at the Nairobi Securities Exchange. Secondary sources of data were employed. Panel data was utilized, data was collected for several units of analysis over a varying time periods. The research employed inferential statistics, which included correlation analysis and panel multiple linear regression equation with the technique of estimation being Ordinary Least Squares (OLS) and so as to establish the relationship of the financial reporting quality on corporate value. Firm size was incorporated in the study as the control variable. The study findings were that firm size has a significant negative association with firm value (r = -0.3054(p=0.000<0.05)). Additional findings were that that FRQ, with the control effect of firm size, has a significant effect (Prob>F=0.0018) on the firm size of listed firms and thus, it can be utilized to significantly predict the firm value. The final findings were that only accrual quality and firm size had a significant relationship with firm value. They both had negative significant relationships with firm value. The constant (α = 49.93712) implies that when there is no accruals quality and firm size is equal to zero, the firm value is 49.93712. The beta for accruals quality (B1it= 1.027508) implies that when accruals quality increases by one unit, there is a decrease in firm value by 1.027508 units. In addition, the beta for firm size (B2it= 2.893666) implies that when firm size increases by one unit, there is a decrease in firm value by 2.893666 units. Policy recommendations are made to the CMA and NSE, and by extension, the National Treasury, to formulate and enforce rules and regulations on financial reporting quality to boost the capital markets and in extension, the financial system, to mitigate collapse of listed companies and ensure lack of stability in value of financial securities issued in the capital markets. Further recommendations are made to firm management and consultants to implement accrual quality in order to boost firm value. Recommendations were also made to other stakeholders like investment banks, equity analysts, and individual investors should search for firms with accrual quality to invest or recommend to invest because organizations with better accrual quality have lower cost of capital, that additionally may influence the value of a firm.