Board Characteristics and Earnings Quality of Non-Financial Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

The characteristics of the board are important elements of corporate governance that are anticipated to enhance the earning quality. The board and its committees are separate from management and they oversee the company's management. Specifically, the board ensures that directors are accountable to shareholders, checkers against earnings manipulation increases investor confidence, and safeguard the interests of other stakeholders. The primary objective of this study was to examine the relationship between the board characteristics of non-financial firms listed on the Nairobi Securities Exchange and earnings quality. The study examines the effect of board size, audit committee independence, gender diversity, and board independence on earnings quality while examining whether ownership concentration as a moderating variable affects earnings quality. The study was founded on Agency Theory, Stakeholder Theory, Resource Dependency Theory, Positive Accounting Theory, and Expropriation Theory, among others; it was conducted using a positivist research philosophy and a quantitative research design. The study's target population was the 39 non-financial firms listed on the NSE as of 31st December 2020. The study used secondary data collected from financial statements for 13 years from 2008 to 2020. The data were analyzed for descriptive statistics such as means and standard deviation, and inferential statics such as Pearson correlations and regression analysis using the Statistical Package for Social Sciences (SPSS) version 7. The study on board characteristics and earnings quality in non-financial firms listed on the Nairobi Securities Exchange reveals a strong positive correlation between board size and accruals quality, emphasizing the significance of larger boards in determining financial reporting practices. The research highlights that non-financial firms listed on the NSE with a higher proportion of non-executive directors in the audit committee tend to exhibit improved accruals quality and lower discretionary accruals, underscoring the importance of an independent audit committee in enhancing financial reporting quality. The study demonstrates that gender diversity within boards of non-financial firms is moderate, and greater gender diversity is positively correlated with higher earnings quality, indicating the crucial role of gender diversity in influencing financial performance. The research finds that ownership concentration, particularly foreign ownership, is positively related to accruals quality and discretionary accruals, suggesting that higher foreign ownership is associated with better financial reporting quality and greater accounting discretion in non-financial firms listed on the NSE. However, ownership concentration does not significantly moderate the relationship between board characteristics and earnings quality. The researcher recommends that important to strike a balance and ensure that board size is proportionate to the company's size and operational needs. Firms should aim to have a sufficient number of members on their audit committees to effectively fulfill their oversight responsibilities. Companies can implement diversity initiatives, such as targeted recruitment and inclusive policies, to ensure a more balanced gender composition on their boards. Non-financial firms should prioritize the appointment of independent directors and foster a culture of collaboration and frequent interactions among them. Encouraging independent directors to engage in constructive discussions, share diverse viewpoints, and challenge management, when necessary, can enhance financial performance and transparency. Companies should ensure that the rights and interests of minority shareholders are protected, and governance mechanisms are in place to mitigate any potential conflicts of interest that may arise from concentrated ownership.