Effect Of Corporate Governance On Earnings Management Of Companies Listed In The Nairobi Securities Exchange

Abstract

For many years, earnings management has become a major issue of policy makers and practitioners because it compromises integrity of financial statements and manipulates financial statement consumers by supplying them with misleading facts about the actual operating results of a business. Due to its importance to nations' economic growth and progress, corporate governance has also set off to be a topical subject. Poor institutional management is a big factor for even well performing firms to collapse. A claim has been made time and again that every corporate entity's governance system influences the capacity of the organization to adapt to external forces that have some effect on its performance. The key goal this study was to examine the effect of corporate governance on the earnings management of Nairobi Stock Exchange listed firms. The study was specifically guided by the following objectives; to establish the effect of board gender diversity, ownership structure, board independence and audit committee on the earnings management of companies listed at NSE. The finding of this study will benefit investors and financial institutions on the variables that influence share prices and provide better financial guidance on earning management. For the purpose of this study, descriptive research design was adopted. The study targeted sixty-two (62) firms listed at the NSE by the end of year 2021 using census. Secondary data was obtained from NSE published financial report for all firms targeted. The study covered a period of 5 years starting from year 2017-2021. Diagnostic post estimation tests that were analyzed included normality tests, multicollinearity tests, autocorrelation tests, heteroskedasticity tests and unit root tests. The data was analyzed using STATA. The findings of the study indicated that board gender diversity, ownership structure, board independence and audit committee all have a positive a significant relationship with the earnings management of the companies listed at the NSE. The study recommends that two-third gender rule should be observed, privately owned business companies provide better results, at least one of the company directors should also be nominated to be a board member and the involvement of a completely independent audit committee in the management of the operations of the company.