Effects of Corporate Governance on Information Asymmetry Between Managers and Investors in Firms Listed at the Nairobi Securities Exchange

Abstract

This study aimed at investigating how a firm’s corporate governance affects the level of informationasymmetry between managers and investors. The specific objectives of the study were to find out the effect of Board Ownership on the information asymmetry between managers and investors in firms listed at Nairobi Securities Exchange, to investigate how board independence influences information asymmetry between managers and investors in firms listed at Nairobi Securities Exchange and to determine how CEO duality affects information asymmetry between managers and investors in firms listed at NSE. This study was conducted using explanatory research design. The target population was 62 listed companies at the Nairobi Securities Exchange from which the data was drawn. The sample comprised of 32 firms listed in the NSE by the year 2003. Secondary data was collected using a questionnaire which contained both open and closed ended questions. A pilot test was first conducted to test the reliability and the validity of the questionnaire as an instrument. A simple random technique was used to select one staff from the corporate affairs department from each company who were the respondents. Secondary data was collected from companies’ websites, publications and data bought from the NSE. Secondary data collected was analyzed using multiple linear regression equation and the method of estimation was Ordinary Least Squares (OLS) so as to establish the relationship between corporate governance variables and information asymmetry. In order to test the significance of the model, the study conducted an analysis of variance. The results of the ANOVAs test indicate a significant value of .003 and a confidence 99 percent which was obtained indicates that the regression model was significant in predicting the relationship between corporate governance characteristics and information asymmetry. Results from the coefficient of determination test indicated that R Square equals 0.7, that is, changes in aggregate information asymmetry could be explained up to 70 percent by the linear relationship between Board Ownership, Board Independence and CEO/Chair Duality. Findings from the data analyzed and tabulated from the questionnaires collected revealed 65% of the respondents indicated that the CEO/Chairman given share options in the organization while as 100% of the respondents indicated that their board consisted of both executive and non executive member and as such exercised some level of independence. Most (61%) of the respondents agreed the board review CEO compensation annually and 65% indicated that this compensation included share options . 39 % of the firms disclose their quarterly financial statement in the firm’s web page, 17 % of the firms disclose their directors selling or buying shares in the firms statement or in the firm’s web page, 65 % of the firms disclosed their directors reports in the firm’s web page and all (100 %) of the firms disclose their audited annual reports in the firm’s web page. From the results of the ordinary least square (OLS), Board Ownership and Board Independence were significantly negatively related to information asymmetry i.e. coefficients of -5.53 and - 6.94 respectively while CEO/Chair duality was positively related to information asymmetry at +2.98. The levels of significance for all the variables were, 0.002, 0, and 0.001 respectively indicating a more than 97% confidence level. The results agree with Raheja (2005) and Myerson (1987) who found the existence of significant relationship between corporate governance variables