The effect of corporate governance practices on earnings management for the listed commercial banks in Kenya

Abstract

The association between quality of corporate governance structures and firms' profitability is quite major focus in corporate governance practices. Banks are considered more sensitive as they hold depositors monies, and for their effect or role on Kenya‟s economy in regulating the amount of money supply. It is important to understand corporate governance in banks for several reasons. When banks efficiently allocate funds, it lowers the cost of capital to firms, enhances capital formation, and stimulates growth in the economy. The stability of financial system serves a broad role in the economic development and bank failure can reverberate with strong negative implications. Kenyan banks have in the recent past experienced a number of corporate failures related to corporate governance structures in place. This study sought to examine the effect of corporate governance practices on earnings management for the listed banks in Kenya. This study adopted a descriptive research design. The target population consisted of the 11 commercial banks listed at NSE as at 2013. The study adopted a census study approach due to the small population selected. Secondary data was obtained by abstraction method from corporate governance statements and financial statements for the 11 commercial banks covered as they had been published by NSE. Descriptive analysis was used (means scores and percentages) to analyze the extent of board independence. The regression results were interpreted based on the Pearson correlation, R-squared, adjusted Rsquared, Test of significance using F statistic through the Analysis of Variance (ANOVA), coefficients of the independent variables and their p-values. From the findings, the coefficient of determination R2 equals 0.815 implying that, Size, board size, board composition, board meetings, executive compensation explains 81.5 percent of the variance in earnings management amounts and the overall model is significant. In general, this study concluded that firms with effective corporate governance practices and undertake less earnings management. Although not all corporate governance variables support the stated hypotheses, the study achieved its objective by identifying the attributes that answer the research question. This implies that agency theory offers a generally good explanation of the associations between both corporate governance practices with earnings management practice. The study concluded that an increase in non executive directors / total directors as well as Executive compensation is positively associated with earnings management. On the other hand, an increase in total number of directors in the board, number of board meetings, ratio of total debt to total assets and size is negatively associated with earnings management. Based on the findings, this study recommends that the number of non executive directors / total directors as well as executive compensation be moderately reduced in order to reduce the risk of cases of earnings management. The study also recommends that the number of total of directors in the board, board meetings, ratio of total debt to total assets and size be increased and thereby reduce earnings management in the organizations.