Corporate Governance and Profitability of Manufacturing and Allied Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

The study examined the effect of corporate governance on the profitability of manufacturing and allied firms listed at the Nairobi Securities Exchange, Kenya. The study was anchored by agency theory and stakeholder theory. Nine manufacturing and allied firms listed at the Nairobi Securities Exchange, Kenya constituted the target population and a census approach was adopted. The study found that board size had significant implications on the profitability of manufacturing and allied firms listed at the Nairobi Securities Exchange, Kenya (p= 0.009, β= -0.023). It was established that board independence is significant in predicting profitability (p= 0.011, β= -0.001). External audit quality had a significant effect on profitability (p= 0.001, β= 0.258). Institutional ownership was significant in determining profitability (p= 0.000, β= 0.002). The study recommends that listed manufacturing and allied firms should ensure that an effective board is constituted which is optimum in size. The study further recommends that a blended board should be ensured comprising of both executive and non-executive directors which reflects the level of independence of the board. It was also recommended that firms should ensure that a highly reputable external auditor is appointed. In addition, firms should strive towards having a higher proportion of institutional shareholding to outstanding shareholdings. Given the 53.53 percent unexplained variation in profitability, further studies on manufacturing and allied firms listed at the Nairobi Securities Exchange, Kenya can consider other corporate governance attributes.