The effect of voluntary disclosure on the financial performance of commercial Banks in Kenya

Abstract

Good corporate governance is indispensable for the survival and performance of corporate entities and the purpose of the Capital Markets Authority‟s guidelines on good corporate governance is to improve governance practises in the corporate sector hence attracting and retaining investors for sustained economic growth. The objective of this study was to investigate the effect of voluntary disclosure on the financial performance of commercial banks in Kenya. The study examined general and strategic disclosure, financial disclosure, forward looking disclosure and social and board disclosure as proxies for measuring voluntary disclosure and how they affect the financial performance of commercial banks in Kenya. Firm performance was measured using Return on Equity (ROE). The study adopted a descriptive research design with a study sample of 42 commercial banks in Kenya and the data was collected by developing a disclosure index consisting of 47 disclosure items. Secondary data was collected from annual reports of the 42 commercial banks for a period of 6 years from 2008 to 2013. Data was analyzed using a multiple linear regression model. The study found a positive relationship between financial, forward looking and board and social disclosure and return on equity. A 1% increase in financial disclosure leads to a 54% increase in financial performance of commercial banks, while a 1% increase in forward looking disclosure leads to a 33.9% increase in return on equity and a 1% increase in board and social disclosure leads to a 50.3% increase in return on equity. On the other hand, the study found a negative relationship between general & strategic disclosure and return on equity this means that a 1% increase in strategic disclosure leads to a 20.2% decrease in return on equity of a firm. The study concluded that firms should lean towards disclosure of financial and social and board disclosure to increase their performance.