Abstract:
The purpose of the study was to investigate the effect of corporate governance on financial performance of listed financial services firms in Kenya. The objective of the study was to establish the relationship between four corporate governance characteristics namely; board size, board composition, board remuneration, and director’s equity holdings on financial performance.
The study adopted a mixed-design time-cross-sectional research design. Out of a target population of 281 senior executives from the 20 financial services companies listed at the Nairobi Securities Exchange, stratified random sampling was used to generate a sample of 165 respondents. Primary data was collected using questionnaires. Secondary data was drawn from statements of financial performance of individual companies. Descriptive analysis was used to summarize results into means, frequencies and percentages. A linear regression model was used on pooled cross-sectional time-series data to establish the relationship between corporate governance and financial performance.
The findings show a positive and significant relationship between board composition and director’s equity holding on the return on assets, but board size and board remuneration does not have a positive and significant effect on the return on assets. The regression coefficients also show that board composition and board remuneration are significantly related with return on equity. However, board size and director’s equity holding are not significantly related to return on equity. Both board composition and board remuneration had a significant effect on dividend yield. The study did not establish a significant influence of board size and director’s equity holding on dividend yield. Finally, the results show that all the corporate governance variables: board size board composition, board remuneration and director’s equity holding did not have a positive and significant effect on earnings per share. There were differences in the degree of association between corporate governance and financial performance when the findings were disaggregated to banking, insurance, and investment sectors.
The study concludes that corporate governance affects financial performance; however, the degree of effect differs on the measure of financial measure used. The effects also vary from one industry segment to another. This means a “one-size-fits-all” approach does not and recommendations of action have to take into account differences between the sub-sectors, such as those in banking, insurance, and investment segments under the financial services segment at the Nairobi Securities Exchange.
