Estimating risk premia for corporate governance risk in the Kenyan equity market

Abstract

This study estimates the premia demanded by investors for corporate governance risk in the Kenyan equity market. Using the OECD/G20 corporate governance principles, corporate governance indices are constructed for the 10 of the NSE 20 share index constituents for the period 2008 to 2015. The indices use objectively observable principles that cover shareholder and stakeholder rights, disclosure and transparency as well as board responsibilities. The arbitrage asset pricing framework is then applied to determine the risk premia associated with corporate governance risk. The findings show that for the period under consideration, corporate governance risk attracted a premium of approximately between 4.64% and 15.16% in the NSE. The risk premia suggest disclosure and transparency standards rank above other elements of corporate governance in order of importance to investors in Kenya’s equity market.