The Relationship Between Board Characteristics and Financial Reporting Quality of Firms Listed in the Nairobi Securities Exchange

Abstract

The purpose of this research was to investigate the link between board characteristics (expertise, independence, managerial share ownership, and firm size as a control variable) and the financial reporting quality of the Nairobi Stock Exchange listed organizations. The research was guided by two major theories: agency and stewardship. These theories explain the association between the directors of an organization and its shareholders. The review of the literature identified various studies which relate to the topic as well as several gaps that needed to be covered in the current study. Among the gaps in the literature review included that a lot of the studies have been done outside the Kenyan context while those conducted within Kenyan did not cover relevant aspects of board characteristics explored in this study which was the focus of this study. In conducting this study, a descriptive research design was adopted. The targeted population entailed all NSE-listed organisations from 2017 to 2021 which involved 57 organisations. Secondary data from majorly the organizations’ financial reports was collected to aid in the research. The researcher used SATA software to analyse data and answer the research question. Multiple-linear regression was used to assess the relationship among the study variables while diagnostic tests were conducted to validate the assumptions. Out of the 57 targeted organizations, only the data of 52 of them was available within the study period with some entities having either closed down or acquired. The diagnostic tests confirmed the absence of autocorrelation, absence of a normal distribution, absence of noteworthy multicollinearity, absence of a unit root, and the presence of homoscedasticity which indicated that the model was fit for testing the variables. The regression analysis proved a positive significant relation between board characteristics and financial reporting quality. Particularly, board expertise and board independence exhibited a positive significant relation while firm size showed a negative significant relationship. However managerial share ownership is a negative but insignificant relationship.

The purpose of this research was to investigate the link between board characteristics (expertise, independence, managerial share ownership, and firm size as a control variable) and the financial reporting quality of the Nairobi Stock Exchange listed organizations. The research was guided by two major theories: agency and stewardship. These theories explain the association between the directors of an organization and its shareholders. The review of the literature identified various studies which relate to the topic as well as several gaps that needed to be covered in the current study. Among the gaps in the literature review included that a lot of the studies have been done outside the Kenyan context while those conducted within Kenyan did not cover relevant aspects of board characteristics explored in this study which was the focus of this study. In conducting this study, a descriptive research design was adopted. The targeted population entailed all NSE-listed organisations from 2017 to 2021 which involved 57 organisations. Secondary data from majorly the organizations’ financial reports was collected to aid in the research. The researcher used SATA software to analyse data and answer the research question. Multiple-linear regression was used to assess the relationship among the study variables while diagnostic tests were conducted to validate the assumptions. Out of the 57 targeted organizations, only the data of 52 of them was available within the study period with some entities having either closed down or acquired. The diagnostic tests confirmed the absence of autocorrelation, absence of a normal distribution, absence of noteworthy multicollinearity, absence of a unit root, and the presence of homoscedasticity which indicated that the model was fit for testing the variables. The regression analysis proved a positive significant relation between board characteristics and financial reporting quality. Particularly, board expertise and board independence exhibited a positive significant relation while firm size showed a negative significant relationship. However managerial share ownership is a negative but insignificant relationship.