Effect of Corporate Governance on Financial Reporting Quality of Insurance Firms in Kenya

Abstract

This study investigated the effect of corporate governance on the financial reporting quality of insurance firms in Kenya, a sector where transparent and accurate financial reporting is crucial for stakeholder confidence and regulatory compliance. Anchored on agency theory and supported by stakeholder theory and institutional theory, the research aimed to determine how board size, board independence, gender diversity, and board concentration influence financial reporting quality, measured by the IFRS Disclosure Index. The study also examined the role of firm liquidity and firm size as control variables. The target population comprised the 57 insurance firms operating in Kenya as of December 2023. Secondary data were collected from the annual financial reports of these firms over the period from 2019 to 2023, sourced from the Insurance Regulatory Authority's publications. The study employed a panel regression model to analyze the data, with the regression equation incorporating the independent and control variables to evaluate their impact on financial reporting quality. The regression analysis yields significant findings: board size (Coef. = 0.032, p = 0.029), board independence (Coef. = 0.095, p < 0.001), and gender diversity (Coef. = 0.082, p = 0.001) are all positively and significantly associated with financial reporting quality. Liquidity (Coef. = 0.033, p = 0.008) and firm size (Coef. = 0.103, p = 0.027) also show positive and significant relationships with financial reporting quality. However, board concentration does not have a significant effect (Coef. = 0.118, p = 0.232). The R-squared value of the model is 0.4838, indicating that approximately 48.38% of the variance in financial reporting quality is explained by the model's variables. The Wald chi-square statistic of 48.87 with a p-value of 0.000 confirms the overall significance of the model. The study concludes that effective corporate governance, characterized by larger boards, greater board independence, and higher gender diversity, significantly enhances the financial reporting quality of insurance firms. Firm liquidity and size also contribute positively to financial reporting quality, underscoring the importance of financial stability and resource availability in ensuring robust financial reporting practices. Based on these findings, several recommendations are proposed. Regulatory bodies should encourage insurance firms to optimize board size and ensure a higher proportion of independent directors to enhance oversight and reduce conflicts of interest. Policies promoting gender diversity on boards should be implemented to leverage the benefits of varied perspectives in governance practices. Firms should maintain adequate liquidity levels and benchmark best practices from larger firms to improve financial reporting quality. Future research should expand the scope to include other sectors and regions, allowing for comparative analyses that can identify industry-specific or region-specific governance factors.