Mergers and Acquisitions, Corporate Governance and Asset Quality of Commercial Banks in Kenya

Abstract

M&A are competitive advantage strategies used by firms to raise capital, capture strategic markets and resources and to enter markets. In the recent past there has been an increase in the number of M&As transactions in Kenya, particularly amongst the commercial banks. The motivation for this is based on the call to raise core capital by central bank of Kenya. Increased core capital is believed to be a better strategy i-6+f de risking the banking industry and a way of protecting depositors from the adverse effects of downside risks. The assumptions of resource-based theory postulate that bigger banks are have better access to unique resources thus enabling them to outperform its peers. Given these assumptions it is expected that the M&As will lead to better corporate governance and consequently this will affect asset quality positively. The theoretical rationale for this lies on the fact that shareholders are more likely to institute better controls if the value of their capital at risk is more. Moreover, the consolidated entity will have better chances of hiring and retaining talent thus improving on risk management. Similarly, the agency theory supports the notion that better governance reduces adverse selection thus impacting asset quality positively. While the synergies theory assumes that the combined entity is achieves operation efficiency hence leading to better asset quality. Despite the relative importance of these concepts, most studies in Kenya have ignored to look at how M&As affect asset quality. Instead, these studies have concentrated on how M&As affect performance. This study therefore sought to establish the relationship among mergers and acquisition, corporate governance, and asset quality. The financial statements of 18 banks which have had M&A transactions in the last 5 years were used as the main source of information. The study used T-test to compare pre- merger asset quality and corporate governance and post-merger values. The study will contribute immensely to practicing managers who will gain significant understanding on how the concepts are interrelated. The study will also contribute towards theoretical development by filling in the literature gaps identified. The results found that M&A improves asset quality. The study also found that corporate governance has a positive impact on the relationship between M&A and asset quality. The study therefore suggested that a similar study be conducted but concentrating on East Africa as a region to identify the risk management gaps