Moderating Effect of Board Composition on the Determinants of Financial Performance of Companies Listed on the Nairobi Securities Exchange in Kenya

Abstract

The study aims to investigate moderating effect of board composition on determinants of financial performance of companies listed on the Nairobi Securities Exchange in Kenya and was guided by the following specific research objectives: to establish the effect of corporate income tax on financial performance of the companies listed on the NSE in Kenya, evaluate the effect of Capital adequacy on financial performance of the companies listed on the NSE in Kenya, examine the effect of firm ownership on financial performance of the companies listed on the NSE in Kenya, determine the effect of market capitalization on financial performance of the companies listed on the NSE in Kenya, assess the effect of financial leverage on financial performance of the companies listed on the NSE in Kenya and finally find out the moderating effect of board composition on financial performance of the companies listed on the NSE in Kenya. The research design used in this study was mixed research designs both qualitative and quantitative design. A sample of 59 firms was drawn using stratified random sampling and purposive sampling. The target populations of the study were the 69 companies listed on the Nairobi Securities’ Exchange in Kenya. The study focused on listed firms only. A pre-test on a different sample gave a Cronbach’s alpha greater than 0.7 for all the variables. Data analysis was by descriptive statistics and inferential statistics using Standard statistical techniques including Pearson correlation coefficient and regression analysis were employed in the analysis. All the analysis was done using the statistical package for social sciences (SPSS Version.24). Analysis of variance (ANOVA) was used to establish if there is a statistical significance between the observed and expected values with the Pearson Chi square giving the degree significance of the relations, hence establishing the hypotheses. In multivariate analysis, multiple regression analysis models were used to determine the type of the relationship that existed between independent and dependent variables. Hypotheses were tested by regressing independent variables against dependent variables, financial performance. The findings indicated that all independent variables had a significant positive influence on the company’s financial performance. When all independent variables were analyzed together, corporate income tax and capital adequacy had the highest positive significant contribution on financial performance. This can be attributed to the fact that corporate income tax reduces investment through an increase in the user of cost of capital. For capital adequacy it’s backed by the fact that it creates liquidity for the bank due to the fact that deposits are most fragile and prone to bank runs hence enhance performance. Therefore it can be concluded that there was a strong relationship between corporate income tax, capital adequacy, firm ownership, market capitalization and financial leverage and financial performance. The study recommends that there is need to identify policy makers with useful input for formulating Government policies to avert poor performance and consequently bankruptcy of listed companies and enlighten the investors who will be interested in the study as they will be in a position to protect their investments and direct them to the best performing companies at the Nairobi Securities Exchange which will in turn spur economic growth in the long-term.