Meditiating effect of code compliance implementation on the relationship between corporate governance and financial performance of listed firms in Kenya

Abstract

There is growing recognition that robust corporate governance practices can enhance transparency, accountability, and investor confidence, which are crucial for financial growth. Compliance with corporate governance codes is expected to mitigate risks, improve decision-making, and foster sustainable financial performance among listed firms. This study sought to establish the mediating effect of corporate governance code compliance implementation on the relationship between corporate governance and financial performance of listed firms in Kenya. It also sought to establish the controlling effect of risk management on the relationship between corporate governance and financial performance of listed firms in Kenya. The study adopted agency and stakeholder theories based on positivism philosophy and correlational research design. The study targeted 41 firms listed at the NSE for ten years between 2014 and 2023. It was based on balanced panel secondary data from the annual reports of individual firms from the NSE website. This study adopted an event study methodology in the data collection. This was done 4 years before the code and 6 years after the code. The data was gathered via data collection sheet and analysed through descriptive and inferential techniques. The inferential statistics involved the use of multiple regression analysis. The findings showed that integrated reporting requirements, governance audit and mandatory director training had a positive effect on financial performance. However, board structure had a negative effect on financial performance. On the other hand, risk management showed a positive controlling effect on the relationship between corporate governance code implementation and financial performance. The findings showed that corporate governance code implementation had a positive but insignificant effect on financial performance. The study concluded that corporate governance code implementation had an insignificant effect on the relationship between corporate governance and financial performance of listed firms in Kenya. This study recommends that listed firms increase integrated reporting, governance audits and adoption of corporate governance code for improved financial performance among listed firms in Kenya. There is need for the listed firms to ensure balanced board composition with a reduced number of executive director and increased independent directors in the board. The study recommends similar studies based on other factors influencing financial performance, other listed firms, and primary data. This study is limited by the variables, scope and methodologies adopted.