The Effect Of Corporate Governance Practices On The Share Prices Of Companies Listed At The Nairobi Securities Exchange

Abstract

The improvement of corporate governance practices is widely recognized as one of the essential elements in strengthening the foundation for the long-term economic performance of countries and corporations. Following the financial crises in the latter part of the 1990s and 2000, the issue of corporate governance has risen to the head of the international agenda as an important component of the global financial architecture. In Kenya, recent corporate distress as witnessed in listed companies at the NSE namely; Uchumi Supermarkets Ltd, EAPCC, and CMC Holdings Ltd (CMC) brought into fore the need for good corporate governance practices. This study thus sought to evaluate the effect of corporate governance practises on the share price of companies listed at the NSE and aims to provide insight as to the significance of corporate governance practises on share prices of the NSE 20 share index constituent companies for years 2011 and 2010. This study thus evaluated corporate governance practises, return on assets, earnings per share and debt to equity ratio against share price so as to determine the significance of corporate governance practice against the other financial ratios. A cross-sectional regression analysis using SPSS was done for this study wherein a correlation of above 0.5 meant that the two variables are having high correlation and hence dependent upon each other. This study found out there is a direct relationship between corporate governance practises and share price. Tine absolute values indicate that indicate that corporate governance score which is derived from the corporate governance principles had the greater weight when it comes to determining share prices followed by earnings per share then debt/equity ratio and return on assets. This study recommends that the corporate governance framework for listed companies in Kenya should be strengthened by incorporating all of the OECD principles of corporate governance and converting the corporate governance guidelines to regulations so as to ensure enforceability.