Thesis:

Influence of board characteristics on earnings management in manufacturing firms listed in the Nairobi Securities Exchange

It is widely recognized that earnings, as a crucial accounting information item on the income statement, hold significant importance for both current and potential investors. They rely on earnings to assess the financial strength of a firm and make informed evaluations regarding its future prospects. However, contemporary directors sometimes engage in earnings management practices, using them to deceive investors despite the existence of clear financial reporting frameworks. The aim of this study was to examine the effect of board characteristics on earnings management within manufacturing firms listed on the Nairobi Securities Exchange. Specifically, the study examined the influence of board independence on earnings management, influence of CEO duality on earnings management, effect of board size on earnings management in firms listed on the Nairobi Stock Exchange and the effect of board diversity on earnings management in firms listed on the Nairobi Stock Exchange. To achieve this, a descriptive research design was employed, targeting all eight manufacturing and allied firms listed on the Nairobi Securities Exchange. Secondary data was utilized for this study, collected from published financial statements spanning from 2019 to 2023. A data collection sheet was employed to gather the necessary information. Descriptive statistics, including measures such as mean, standard deviation, minimum, and maximum values, were used to analyze the data. Furthermore, the researcher employed panel regression models and assess the model fitness using F-statistics since the data was collected for 5 years among 8 listed manufacturing firms at NSE. The analyzed data was presented using frequency tables, facilitating the researcher's interpretation of the research findings. Descriptive statistics revealed board independence was found to be 0.65 with a standard deviation of 0.114. The mean ratio of CEO duality was reported as 0.172 with a standard deviation 0.0813. The mean ratio of board diversity was determined to be 0.333 with a standard deviation of 0.101. The mean ratio of board size to firm size was reported as 0.131, with a standard deviation of 0.205. Panel correlation analysis shows positive relationships between board characteristics (r=0.3616, P=0.000), board diversity (r=0.5658, P=0.0001), board size (r=0.1107, P=0.4965) and earnings management while negative relation between CEO duality (r=-0.4826, P=0.0016) and earnings management. Panel regression analysis revealed significant coefficients for board independence (β = 0.4053, p < 0.05), CEO duality (β = -0.3345, p < 0.05), board diversity (β = 0.1139, p < 0.05) while board size had insignificant coefficient (β = 0.163917, p=0.073). The study concluded that board characteristics had mixed effect on earnings management of listed manufacturing firms. Board characteristics and board diversity was found to have positive significant effect while CEO duality was found to have negative significant effect. On the other hand, board size was found to have positive insignificant effect on earning management. These findings suggest the importance of governance mechanisms in influencing earnings management practices. Recommendations include prioritizing independent directors, separating CEO and board chair roles, optimizing board size, and enhancing board diversity. Further research could explore the dynamics of board independence, CEO duality, optimal board size, and the evolving landscape of earning management standards in emerging markets like Kenya. Finally, the study has pinpointed further research gaps that can be filled by subsequent academic work.