Effects of corporate governance on Stock return of commercial banks listed at Nairobi securities exchange

Abstract

The purpose of the study was to determine the effect of corporate governance on stock returns of commercial banks listed in the NSE. The research design used in this study was descriptive. The population chosen for this study was the commercial banks listed in the Nairobi Securities Exchange. The use of the listed firms was due to data availability and reliability because all the quoted companies are required by law and NSE rules to file reports with the exchange and also CMA.In this study, the eleven listed profit-making banks at the Kenyan security market were involved in the study to investigate the effect of CG framework on stock returns. The study found that from the board structure, majority of the respondents indicated that there was limited access to large board sizes that hinder the discussion of sensitive issues in the organization. The study found out that 75% of the commercial banks listed in the Nairobi Securities Exchange had adopted good corporate governance practices which enhanced balance of power. It was established that most banks ensured that proportion of outside directors had been greatly implemented in the organization; the required board size and the number of meeting in a year were also observed as required. The regression analysis further established that there was a significant relationship between stock returns and corporate governance practices. The study concluded that the companies had exhibited an increase in implementation of good corporate governance practices which can be attributed to the high level of adoption of the guidelines, board size, proportion of outside directors and the number of meetings in a year. It also concluded that there is a significant relationship between stock returns and corporate governance practices; this means that, companies practicing good corporate governance practices are likely to enjoy higher stock returns. The study recommended that companies should highly consider the implementation of good corporate governance practices since they ensure balance of power and contribute to a strong association with the firm’s profitability and market value. Managerial ownership also operates without showing any evidence of a negative inflection point. Moreover, CMA guidelines should be implemented in these companies as it contributes to good corporate governance.