Effects Of Internal Governance Mechanisms On The Financial Performance Of Companies Listed At The Nairobi Securities Exchange

Abstract

The purpose of this paper is to explore effect of internal corporate governance mechanisms on firm performance. Whether a good corporate governance causes higher firm performance is still a valid research question for reasons like ambiguity regarding the direction of causality. The internal corporate governance mechanisms were represented by Ownership Structure, Board Size, Management Compensation, Firm Size and Non-executive Directors have a great effect on corporate performance. The financial performance evaluation criteria used in this study was Return on Assets and to establish it is affected by internal corporate governance mechanisms. . Our results also show no significant evidence to support the idea that outside directors help promote firm performance. In addition, the study found that the measure of performance matters for analysis of corporate governance studies. We found in some cases different results from the use of Returns on Assets (ROA) as a measure of firm performance. The required information was collected from annual reports from the companies that constitute the NSE 20 share index. A multiple regression analysis was conducted to establish the linear relationship between firm performance and the internal governance mechanisms. Data gathered were analysed using descriptive statistics, correlation, and regression. Five main internal governance mechanism variables were analysed in terms of their relative impact on corporate performance as defined Return on Assets (ROA) Based on the results of the study; it has been observed that Board Size, Non-Executive directors and Ownership structure variables have a significant effect on firm performance.