Corporate governance, capital structure, regulatory compliance and performance of firms listed at the East African community securities exchange

Abstract

The purpose of the study was to establish the effec t of corporate governance, capital structure, and regulatory compliance on performance of firms listed at the East African community securities exchange. Specifically the stu dy sought to establish the effect of capital structure and regulatory compliance on the relationship between corporate governance and firm performance of listed companies in Kenya, Tanzania, Uganda, Rwanda and Burundi. The moderating, intervening and the joint effects of capital structure and regulatory compliance on the relation ship between corporate governance and firm performance were tested. Based on the agen cy theory this study builds a comprehensive framework to answer the research ques tion on whether good corporate governance affects firms performance by integrating capital structure and regulatory compliance into the governance model. A census sur vey was carried out on all the 98 listed companies between 2009 and 2013 in Nairobi S ecurities Exchange, Uganda Securities Exchange, Dar es Salaam Stock Exchange a nd Rwanda Stock Exchange. Out of the 98 firms that were targeted, 56 were analyze d constituting 57%. The study developed a Corporate Governance Index as a proxy f or corporate governance and the index constitutes board structure and composition, ownership and shareholding, transparency, disclosures and auditing, board remun eration and corporate ethics. The accounting and market based measures were used as f irm performance measurements and for comparison purposes the cost of capital was als o considered. Hypotheses were tested using regression analysis and Pearson’s Product Mom ent Correlation analysis. Descriptive statistics were computed for the listed companies and the main characteristics of the study variables. The findings revealed that the influence of corporate governance on firm performance was statistically significant. There was a significant positive relationship between corporate governance and firm performance. The study also confirmed that there is a positive significant inte rvening effect of capital structure (leverage) and a positive significant moderating ef fect of regulatory compliance on the relationship between corporate governance and firm performance. The joint effect of capital structure and regulatory compliance on firm performance was greater than the individual effects of capital structure and regulat ory compliance on firm performance. From a theoretical perspective, this study not only explains how corporate governance affects firm performance, but also uncovers the imp ortance of capital structure and regulatory compliance in a corporate governance sys tem. The study not only contributes to understanding the link between corporate governa nce and firm performance but at the same time confirms the findings of previous studies that have found a significant link between corporate governance and firm performance. The study brings out an increased understanding that the combinative effect of the st udy variables is greater than the individual effects therefore organizations can enha nce their performance by implementing good corporate governance practices