An empirical test of shareholder monitoring hypothesis at the Nairobi Securities Exchange

Abstract

Most corporate governance studies have focused on the composition and effectiveness of board members, little attention has barely focused on the interaction between the identity of significant shareholders and thedecisions they influence in the firm. Corporate governanceliterature is currently based on empirical studies in developed countries, but the efficiencyof developed and developing markets'corporate governance mechanisms is disparagingly different. This paper presents an ideal moment for examining the large shareholder monitoring hypothesisat Nairobi Securities Exchangewhich isa developing securities exchangemarket. Previous studies examining the interaction between corporate governance andfirm value have emphasized the significance of institutional shareholder monitoringand dividend policyand capital structuredecisions ascorporate control mechanisms that influence value creation in a firm. This study is supported by dividend signaling, capital structure theory,and shareholder monitoring hypothesis. The data forthe study is forthe period (2008-2017)andthe target population issixty-six companies trading securities at NSE 2008-2017.The findings of this studysuggest that dividend signaling is still a relevant theoretical explanation for dividend payment by companies with diverse shareholdersand large shareholder monitoring has no strong theoretical significance on its own but empirical evidencepresents a complementary explanationfor the role of large shareholders at theNairobi Securities Exchange. Nairobi Securities Exchange hasa high level of ownership concentrationanddividend payment has a significant positiveeffect on the firm value whichis in line withthe signalinghypothesis, the independent roleof large shareholderswasnegatedandtherefore did not support the shareholder monitoring hypothesis. The findings of this study have significant policy implicationsto policymakers,regulators should not rely on the market mechanism as protection to minority owners. Firms should be encouraged to regularly paydividendsif profitable and investorsshould understand the ownership structureof listed firmsthey invest in