The link between compliance with corporate governance disclosure code and performance for Kenyan firms

Abstract

In 2002, The Capital Markets Authority (CMA) of Kenya issued the CMA guideline on Corporate Governance. Listed companies are required to comply or give reasons for non-compliance with the “guideline”. Studies in developed markets investigating the link between compliance and performance of companies have produced mixed results; some have documented weak or non-existent relationship while others have indicated a significant positive relationship between compliance and stock returns. Furthermore, the direction of causality of any relationship is still debatable. We investigated the extent to which differences in the extent of firm level corporate governance disclosures help to explain firm performance in a cross-section of companies listed at the Nairobi Securities Exchange (NSE), an emerging market. We constructed a broad Kenyan corporate governance index (KCGI) for firms listed at the NSE and related it to firm’s performance. We observed a positive relationship between governance disclosure practices and firm performance. This has implications for investing community as quality of disclosure could serve as a signal on which investment strategies could be based.

Keywords: Corporate governance, corporate governance index, firm performance.