Influence of corporate governance practices on financial distress of firms listed at the Nairobi securities exchange, Kenya.

Abstract

Interest on corporate governance has been stimulated by a number of factors, including the collapse of major corporations in the world. Financial distress precedes corporate failure and when prolonged it results in loss of wealth of shareholders, diminishes the confidence of investors in the economy and also creates socio economic problems. This study was based on the agency theory, the resource dependence theory and the stewardship theory. It sought to establish the influence of corporate governance practices on financial distress of companies listed at the Nairobi Securities Exchange. To achieve this overall objective, the study analyzed the influence of board structure, board composition and ownership structure on financial distress of firms listed at the Nairobi Securities Exchange. Additionally, the study sought to investigate the moderating influence of financial leverage on the relationship between corporate governance practices and financial distress. The study used secondary data derived from the audited financial statements and annual reports of companies for a ten year period from 2008 to 2017. This study was undertaken using an ex-post facto explanatory research design. A census of all the 65 firms listed at the Nairobi Securities Exchange provided the data for the study. Panel regression analysis techniques and descriptive statistics were used to analyze data. The t-test was used to determine the significance of the model and also test hypothesis. The study found out that board composition, in terms of board independence, had an inverse but important influence on financial distress, whereas in terms of board diversity it had a direct but significant influence on financial distress. The study established that board structure had a direct but significant influence on financial distress when measured in terms of board activity. The findings also indicated that board structure, in terms of board tenure, had an insignificant influence on financial distress, whereas in terms of board size it had an inverse but significant effect on financial distress. Further, the regression results established that the ownership structure had an inverse and important influence on financial distress when measured in terms of institutional ownership, managerial ownership and block ownership. Besides, the study found out that financial leverage had an important moderating influence on the relationship between board independence, board diversity, board size, board tenure, board activity, block ownership, institutional ownership and financial distress. However, regarding the relationship between managerial ownership and financial distress, the moderating influence of financial leverage is not important. Based on these findings, this study recommends among other things, the need to institute board compositions that reflect high levels of independence and gender diversity. Moreover, corporate stakeholders should ensure that board structures reflect large boards in terms of size. Additionally, corporations should put in place ownership structures characterized by high proportions of block, managerial and institutional shareholding. Since financial leverage was an important moderator, there is need for corporate stakeholders to take account this factor when setting their corporate governance practices parameters