EFFECT BOARD OF DIRECTORS ATTRIBUTES, FINANCIAL EXPERTISE, ON

QUALITY OF FINANCIAL REPORTING AMONG FIRMS LISTED IN NAIROBI

SECURITIES EXCHANGE, KENYA

BY
MARK TOO
Reg. PHD/……..

A CONCEPT PAPER SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS

FOR THE ADMISSION TO D.Phil in BUSINESS ADMINISTRATION

AMECEA GABA CAMPUS

FACULTY OF ….

THE CATHOLIC UNIVERSITY OF EASTERN AFRICA

2019

1
AREA OF STUDY

The study will be conducted in firms listed in Nairobi Security Exchange

2
3
 TABLE OF CONTENTS

TABLE OF CONTENTS.........................................................................................................1

AREA OF STUDY.....................................................................................................................2

LITERATURE REVIEW...........................................................................................................2

PROBLEM SITUATION/DECISION MAKERS DILEMMA.................................................3

STATEMENT OF THE PROBLEM..........................................................................................3

RESEARCH HYPOTHESES.................................................................................................6

OPERATION DEFINITION OF CONCEPT AND VARIABLES............................................8

SCOPE AND DELIMITATION OF THE STUDY....................................................................9

PROPOSED RESEARCH DESIGN.................................................................................................10

SAMPLE SIZE AND SAMPLING PROCEDURE..............................................................................10

DATA COLLECTION INSTRUMENTS............................................................................................10

REFERENCES.......................................................................................................................13

TIME FRAME.........................................................................................................................13

1
 LITERATURE REVIEW
Corporate governance research has shown that the analysis of com-position of boards needs

to pay more attention to board roles, and board members' background and characteristics,

beyond the traditional monitoring and control role (Ruigrok et al., 2007).Beyond its role of

ensuring the alignment of interests between shareholders and managers, dominated by agency

theory and focusing on the monitoring and controlling role of boards(Daily et al., 2003),

research brought evidence that another crucial role of the board of directors is to provide

resources to the firm, strategic advice, knowledge, resources and networking for the company

(Chen et al., 2015; Huse, 2007).

Board of directors plays an important role in monitoring and advising managers and aligning

their interests with the interests of shareholders (Armstrong et al, 2010). In fact, boards of

directors, as corporate governance mechanisms, affect managers’ decision-making regarding

different aspects of a firm’s performance such as financial reporting (Srinidhi et al, 2011). To

understand the factors that affect directors’ ability to perform these roles, there is now a line

of studies investigating how directors’ characteristics, either mandated (e.g., independence) or

not (age, experience, gender), affect their performance (Armstrong et al,2010). Up until now,

most research focuses on the mandated facets of board diversity such a independence (Klein,

2002). For example, firms with a higher percentage of independent directors have a superior

earnings quality and a better information environment (Armstrong et al, 2010).

PROBLEM SITUATION/DECISION MAKERS DILEMMA

The quality of financial reporting is important for the efficient allocation of resources in

capital markets. Quality of financial reporting does not only mean earnings or stock price

changes, but it is a multi-dimensional term that requires comprehensive measures of quality

2
accounting information (IASB, 2008). In addition, the wave of recent scandals and loss of

billions of shillings of investments in state corporations in Kenya, timeliness in reporting and

disclosure quality has been questioned. Two business indices used in Kenya in 2009;

Business Indicator Index (KIBII) ranked Kenya at 71 out of 100 countries with a score of

6.48 out of full score of 12 while E-standards forum index ranked Kenya at 72 out of 100

(Outa, 2011). These two indices showed that Kenya compliance with International Financial

Reporting Standards (IFRSs) was quite low.

STATEMENT OF THE PROBLEM

Very little is known about the effects of board directors attributes and audit committee

financial expertise and quality of financial reporting in developing economies particularly

Kenya where the corporate governance guideline 2002 is unique and different from other

countries. Despite a high degree of uncertainty inherent in firms undertaking audit committee

activities and the role of financial reporting quality in reducing the risk of information about

the firm, the existing literature has provided little insight into the indirect relation between

financial reporting quality, board of directors attributes and audit committee financial

expertise. Hence, the study therefore aims to fill the gap by assessing how board of director’s

age gender, board activities, independence and board tenure affect quality of financial

reporting. In addition, the study moderating effect of audit committee financial expertise on

relationship between board of director’s attributes and quality of financial reporting by firm

innovation

3
VARIABLES

Audit committee financial

expertise
Board of directors
attributes attributes

Board activities
H01 H05a
H05b
Board experience H05c
H02 H05d
Quality financial reporting

Board independence
H03

Board gender
H04

Figure 1: Conceptual Framework

RESEARCH QUESTION

This research will be guided by the following research questions:

i. What is the effect of board activities on quality financial reporting of listed firms?
ii. How does board experience affect quality financial reporting of listed firms?
iii. How does board independence attributes affect quality financial reporting of listed

firms?
iv. Does board gender affect quality financial reporting of listed firms?
v. What is the moderating effect of Audit committee financial expertise on the

relationship between board of director’s attributes and quality financial reporting of

listed firms?

RESEARCH HYPOTHESES
HO1: There is effect of board activities on quality financial reporting of listed firms

4
HO2: There is effect of board experience on quality financial reporting of listed firms

HO3: There is effect of board independence on quality financial reporting of listed firms

HO4: There is effect of board gender on quality financial reporting of listed firms

HO5: There is moderating effect of Audit committee financial expertise on the relationship

between board of director’s attributes and quality financial reporting of listed firms

THEORETICAL FRAMEWORK

The Agency Theory

The study will be informed by agency theory by Jensen and Meckling (1976). The theory

shows the distinction between control of the firm and ownership by creating conflicts of

interest amongst the managers and the stakeholders. Consequently, Kalbers and Fogarty

(1998) indicated that organizations have the responsibility to utilize control structure to

minimize agency costs. In addition, it has been contended that board organization or

composition is utilized basically in cases when there are high agency costs to enhance quality

of reported information from the agents to the principals. The agency theory indicates that to

guarantee the viability of board structure, managers are urged to get ready financial

statements satisfactorily to determine the return produced by organizations.

The Institutional Theory

Many studies such as Scott (1995) and Zaman (2002), on board composition have relied on

an institutional view. DiMaggio and Powell (1983) indicate that the institutional theory is

described by the notion that a firm is comprised of cultural, social and the broader

institutional setting. The appropriation and the operation of board structure were talked about

in view of this point of view to the degree it proposes that the audit committee can impact and

5
be affected by an assortment of operators (Zaman, 2002). Zaman (2002) points out that this

point of view can upgrade the responsibility of expert bodies, for example, audit committees

of trustees on advancement of administrative authority and to perform better in capacity of

checking and control productively, which a few scholars Bryan et al. (2004) and Klein (2002)

have focused on the significance of specific attributes identified with the individuals that

shape the board.

OPERATION DEFINITION OF CONCEPT AND VARIABLES

Audit committee Financial Expertise Audit committee knowledge and experience as an

accountant or auditor or a principal financial officer,

comptroller, or principal accounting officer of an issue

or having financial qualification such as CPAs and

people with direct accounting experience

Board activity Number of meetings held by the board members per

year

Board gender it is defined as the presence of female directors on the

board of directors of corporations (Carter et al, 2003)

Board Independence An independent board is a corporate board that has a

majority of outside directors who are not affiliated with

the top executives of the firm and have minimal or no

business dealings with the company to avoid potential

conflicts of interests

Board of Directors (BOD) This is the body responsible for directing and

controlling the business of its company and is

6
 accountable to shareholders for its performance (Bowen

2008).

Board of directors experience Refers to the number of years and knowledge/expertise

an board member has been practicing.

Quality of Financial Reporting Refers to disclosure of the company’s transactions,

information about the selection and application of

accounting policies and knowledge of the judgments

made.

SCOPE AND DELIMITATION OF THE STUDY

This study will only cover effect of corporate governance on environmental performance

(measured as disclosure level of environmental accounting information) of listed

manufacturing firms in Nairobi Security Exchange using content analysis on the annual

reports released on the financial year 2017. The population for this study will constitute

manufacturing firms listed companies in the Nairobi Securities Exchange as at December

2017. The Nairobi securities exchange was established in 1954. The NSE has been

instrumental in enabling the public and private sectors in Kenya to raise large amounts of

capital for expansion of new and existing businesses (NSE Handbook, 2013). It thus

represents the financial market in Kenya. There are 9 manufacturing firms in NSE. The study

will only comprise of five firm specific attributes which include; liquidity, leverage, firm size,

profitability and ownership concentration. The only firms trading for the study period will be

extracted.

Proposed Research Design

7
The research design that was used in this study is cross sectional and explanatory studies. In

cross sectional study either the entire population or a subset thereof is selected, and from

these individuals, data are collected to help answer research questions of interest. Explanatory

study usually explore the causal relationship between measures of different variables obtained

from the same individual at approximately the same time to get better understanding of

factors that contribute to a more complex characteristic (Martens, 2009).

Research Paradigm

The study will use positivism. Positivism is often linked with quantitative, scientific,

traditionalist and objective research especially when the data is predetermined and highly

structured which is related to the understanding of this research

Target population

The target population of this study will be 67 listed firms in NSE, the study unit of enquiry

will be published financial statements or annual reports of the listed firms in Kenya. this

study will however, will only choose 51 firms in the NSE being firms which have shown

consistency in the market during the period 2007-2017 giving a total of 510 firm year

observations therefore the target population above is chosen since it provided research

information in respect to the study

Data Collection Instruments

This study will utilize secondary data by use of content analysis which will be obtained from

the annual financial statements reports of listed firms, annual investors’ reports, magazine and

articles using a document analysis guide prepared to enable and guide collection of data .

Data Analysis and Presentation

8
The study will analyse data using panel data analysis techniques with fixed and random effect

estimators coupled with pooled linear regression as an alternative approach. Hierarchical

multiple regression analyses to test for moderator effect will be followed. The hierarchical

regression analysis is used to specify a fixed order of entry for variables in order to test the

effects of certain predictors, independent of the influence of others (Pallant, 2010).

9
References

APPENDIX III: WORK PLAN

Jan Feb Mar Apr May Jun Jul Aug Sep

Topic

selection
Proposal

writing

1st Correction

Defense
Piloting

Data

collection
Analysis

Preparation

of 1st Draf
2nd

Correction

Final

submission
Defense

10