The Impact of Corporate Governance Code on Earnings Management in Listed Non-Financial Firms: Evidence From Kenya

Abstract

Purpose – The purpose of this paper is to examine whether voluntary corporate governance (CG) code issued in 2002 constrain earnings management (EM) among listed non-finance companies in Kenya.

Design/methodology/approach – Using a panel data of 338-firm year’s observations between 2005 and 2014, the authors test the hypothesis that CG constrains EM in non-finance firms listed in Kenya. The authors regress discretionary accruals (DA) against a developed Corporate Governance Index (CGI).

Findings – The overall results show that DA is not significantly related to CG suggesting the voluntary CG code does not deter EM in non-finance companies in Kenya.

Practical implications – Evidence of income decreasing/increasing accruals implies EM still exists among the listed firms. This suggests that policymakers may need to consider radical actions including alternative or new CG approaches and new institutions to improve the effectiveness of CG.

Originality/value – This study extends existing studies by including composite CG as possible explanatory variable for constraining EM. The authors contribute to the debate by demonstrating that the voluntary CG code in Kenya is not effective in constraining DA and therefore the current initiatives by the regulator to change the current CG code are appropriately directed.

Keywords: Discretionary Accruals, Corporate Governance, Kenya, Earnings Management

JEL Classification: M40, M41, O16, O55