BOARD CHARACTERISTICS AND FINANCIAL PERFORMANCE OF

MANUFACTURINGFIRMS LISTED AT THE NAIROBI SECURITIES

EXCHANGE IN KENYA

BY

FRIDAH KANARIO MEME

D58/CTY/PT/25598/2013

A RESEARCH THESIS SUBMITTED TO THE SCHOOL OF BUSINESS IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD
OF DEGREE OF MASTER OF SCIENCE (FINANCE)OF KENYATTA
UNIVERSITY.

JULY, 2017
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DECLARATION
 iii

DEDICATION

This thesis is dedicated to my late father Silas Meme and mother Lucy Meme for

their big dreams in my career. To my threesisters Stellah, Ann and Faith without

whose prayers my two –year course could not have been possible.
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ACKNOWLEDGEMENT

I am grateful to all the persons who assisted me in various ways including provision

of materials and sitting down with me to clarify and guide me along the way. My

appreciation goes to my supervisors, Dr. Ndede F.W.S and Mr. Gerald Atheru for

their guidance and meaningful insight which enabled me to write this thesis. I thank

the whole Kenyatta University Administration team as well as my lecturers in the

Msc. Finance course for their contribution in various ways which equipped me in

writing of this thesis. I appreciate my family and friends for their continued support,

patience, and encouragement which saw me through my thesis. I also thank my

colleagues in the Msc. Finance for their comrade ship and inspiration.
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TABLE OF CONTENTS

DECLARATION ................................................................................................ ii
DEDICATION ................................................................................................... iii
ACKNOWLEDGEMENT ................................................................................. iv
TABLE OF CONTENTS .................................................................................... v
LIST OF TABLES ........................................................................................... viii
LIST OF FIGURES ........................................................................................... ix
OPERATIONAL DEFINITION OF TERMS ................................................... x
ABBREVIATION AND ACRONYMS ............................................................ xii
ABSTRACT ..................................................................................................... xiii

CHAPTER ONE: INTRODUCTION ................................................................. 1

1.1Background of the Study .................................................................................. 1
1.1.1 Financial Performance in the Manufacturing Sector ...................................... 3
1.1.2 Corporate Governance and Financial Performance ........................................ 5
1.2 Statement of the Problem ................................................................................. 7
1.3 Objectives of the Study .................................................................................... 9
1.3.1 Hypotheses of the Study ............................................................................... 9
1.4 Significance of the Study ............................................................................... 10
1.5 Scope of the Study ......................................................................................... 11
1.6 Organization of the Study .............................................................................. 11

CHAPTER TWO: LITERATURE REVIEW .................................................. 13

2.1 Introduction ................................................................................................... 13
2.2 Theoretical Literature .................................................................................... 13
2.2.1 Agency Theory ........................................................................................... 13
2.2.2 Stakeholder Theory ..................................................................................... 15
2.2.3 Resource Dependence Theory ..................................................................... 16
2.3 Empirical Literature ....................................................................................... 17
2.3.1 Corporate Governance and Financial Performance ...................................... 17
2.3.2 Board Size .................................................................................................. 19
2.3.3 Board Diversity .......................................................................................... 20
2.3.4 Independence of the Board.......................................................................... 23
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2.3.5 Moderating Effect of Firm Attributes .......................................................... 25

2.4 Summary of Literature Reviewed and Research Gaps .................................... 26
2.5 Conceptual Framework .................................................................................. 29

CHAPTER THREE: RESEARCH METHODOLOGY .................................. 31

3.1 Introduction ................................................................................................... 31
3.2 Research Philosophy ...................................................................................... 31
3.3 Research Design ............................................................................................ 31
3.4 Model Specification ....................................................................................... 32
3.5 Target Population .......................................................................................... 34
3.6 Sampling Design and Sample Size Determination.......................................... 35
3.7 Data Collection Instruments ........................................................................... 35
3.8 Data Collection Procedure ............................................................................. 36
3.9 Operationalization and Measurement of Variables ......................................... 36
3.10 Diagnostic Tests .......................................................................................... 37
3.10.1 Testing for Normality ............................................................................... 38
3.10.2 Testing for Heteroskedasticity ................................................................... 38
3.10.3 Testing for autocorrelation ........................................................................ 39
3.10.4 Testing for Multicollinearity ..................................................................... 39
3.11 Data Analysis and Presentation .................................................................... 40
3.12 Ethical Consideration ................................................................................... 41

CHAPTER FOUR: RESEARCH FINDINGS AND DISCUSSION ................ 42

4.1 Introduction ................................................................................................... 42
4.2 Descriptive Statistics ..................................................................................... 42
4.3 Correlation Analysis ...................................................................................... 47
4.4 Regression Analysis Results .......................................................................... 54
4.4.1 Testing for Homoscedasticity ...................................................................... 55
4.4.2 Testing for Multicollinearity ....................................................................... 55
4.4.3 Testing for Normality ................................................................................. 56
4.5 Regression Models Estimation ....................................................................... 57
4.6 Regression Analysis Results for Moderation Effect ....................................... 59
4.6.1 Testing for Homoscedasticity ...................................................................... 60
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4.6.2 Testing for Multicollinearity ....................................................................... 61

4.6.3 Testing for Normality ................................................................................. 61
4.7 Estimation of Moderation Effect Regression Models ..................................... 62
4.8 Testing Research Hypotheses......................................................................... 64

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND

RECOMMENDATIONS .................................................................................. 75
5.1 Introduction ................................................................................................... 75
5.2 Summary ....................................................................................................... 75
5.3 Conclusion .................................................................................................... 77
5.4 Contribution to Knowledge ............................................................................ 78
5.5 Recommendations for Practice ....................................................................... 79
5.6 Limitations and Recommendations for Further Research ............................... 80

REFERENCES ................................................................................................. 81

APPENDIX 1: SECONDARY DATA COLLECTION TEMPLATE............. 91

APPENDIX 2: SECONDARY DATA COLLECTION SHEET ..................... 93
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LIST OF TABLES

Table 2. 1: Summary of Literature Reviewed and Research Gaps ......................... 28

Table 3. 1: Target Population................................................................................ 34
Table 3.2: Operationalization and Measurement of Variables ............................... 37
Table 4.1: Descriptive Statstics for Board Characteristics ..................................... 43
Table 4.2: Descriptive Statistics for Financial Performance .................................. 45
Table 4.3: Summary of Descriptive Statistics for Firm Attributes ......................... 46
Table 4.4: Correlations of the Variables: Tobin’s Q as Dependent Variable .......... 48
Table 4.5: Correlations of the Variables: ROE as Dependent Variable .................. 50
Table 4.6: Correlations of the Variables: ROA as Dependent Variable.................. 52
Table 4.7: Test of Fitness of the OLS Regression Models ..................................... 54
Table 4.8: Breusch - Pagan Test for Heteroskedasticity ........................................ 55
Table 4.9: Variance Inflation Factor Test for Multicollinearity ............................. 56
Table 4.10: Shapiro - Wilk Test for Normality ...................................................... 56
Table 4.11: Durbin-Watson Test for Autocorrelation ............................................ 57
Table 4.12: Estimation of OLS Regression Models ............................................... 58
Table 4.13: Breusch - Pagan Test for Heteroskedasticity ...................................... 60
Table 4.14: Variance Inflation Factor Test for Multicollinearity ........................... 61
Table 4.15: Shapiro - Wilk Test for Normality ...................................................... 61
Table 4.16: Durbin-Watson Test for Autocorrelation ............................................ 62
Table 4.17: Estimation of OLS Regression Models with Moderation .................... 63
Table 4.18: Board Size and Financial Performance ............................................... 64
Table 4.19: Board Diversity and Financial Performance ....................................... 66
Table 4.20: Board Independence and Financial Performance ................................ 70
Table 4.21:Moderation Effect of Firm Attributes .................................................. 72
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LIST OF FIGURES

Figure 2.1:Conceptual Framework ......................................................................... 29

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OPERATIONAL DEFINITION OF TERMS

Board of directors: Is a body of elected or appointed member who jointly

oversee the activities of a corporation.

Board Member: A director of a governing board that has overall

responsibility for the management of a corporation

andadvices management on issues facing the

corporation.

Board Characteristics: Features in the Board such as board size, board

independence and board diversity which actually

determine the effectiveness of the board members in

achieving the corporation’s goal of profit

maximization.

Corporate Governance: The process and structure of managing business affairs

of an institution to achieve financial prosperity,

accountability and improveshareholders’ long-term

value. This involves a set of relationships between a

company’s management, its board, its shareholders

and its stakeholders.

Executive director: An inside member of the board who is also an

executive with the corporation.

Financial Performance: The level of performance of a business over a

specified period of time, expressed in terms of overall

profits and losses during that time.

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Firm Attributes: The characteristics inherent in a firm that falls outside

the direct control of a firm and they

includeorganizational size, age and structure.

Governance: The manner in which power is exercised in the

management of economic and social resources for

sustainable human development.

Inside Director: A member of the board who is also an

employee, officer, major shareholder, or someone

similarly connected to the corporation.

Independence: The degree to which board members are not biased or

elsecontrolled by company management or other

groups who exert control over management.

Manufacturing Firms: Establishments engagedin mechanical, physical or

chemicaltransformation of raw materials, substances

or components into new products.

Non-executive director: A member of the board who is not involved in the

company’s administrative or managerial operations.

Outside Director: A member of the board who is not otherwise

employed by or engaged with the corporation, and does

not represent any of its stakeholders.

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ABBREVIATION AND ACRONYMS

AfDB: African Development Bank

CBK: Central Bank of Kenya

CEO: Chief Executive Officer

CFA: Chartered Financial Analysts

CMA: Capital Market Authority

CMSC: Capital Market Steering Committee

GDP: Gross Domestic Product

KAM: KenyaAssociation of Manufacturers

KIPPRA: KenyaInstitute for Public Policy Research andAnalysis

KIRDI: Kenya Industrial Research and Development Institute

KNBS: Kenya National Bureau of Statistics

MAPI:Manufacturers Alliance for Productivity and Innovation

MDG’S: Millennium Development Goals

MGI: McKinsey Global Institute

MVA: Manufacturing Value Added

NSE: Nairobi Securities Exchange

PM: Profit Margin

ROA: Return on Asset

ROE: Return on Equity

UNIDO: United Nations Industrial Organisation

USA: United States of America

VIF: Variance Inflation Factor

WEF: World Economic Forum

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ABSTRACT

Financial performance of the manufacturing sector contributes significantly to the

economic development of both developing and developed economies. In, Kenya the
Vision 2030 identifies the manufacturing sector as one of the key drivers for
realizing a sustained annual gross domestic product growth, of tenpercent. However,
the percentage contribution of manufacturing to the gross domestic product and
merchandise exports has stagnated. Besides, financial performance of the Kenyan
manufacturing sector has been depreciating.The weak performance is attributed to
low investmentscaused byweak corporate governance practices in Kenya. Weak
corporate governance has been reflected by a number of instances where board of
directors among Kenya’s large companies, have been accused of poor corporate
governance practices resulting to corporate failures.Therefore, the need to focus on
corporate governance aspect of board characteristics in theKenyan manufacturing
firms, since poor corporate boards’ can pose as a serious threat to financial
performance of corporations. This study determinedthe effect of board
characteristics on financial performance of manufacturing firms listed at the Nairobi
Securities Exchange in Kenya. The specific objectives were to ascertain the effects
of board size, board diversity and board independence on financial performance of
listed manufacturing firms in Kenya. The study also determined the moderation
effect of firm attributes on the relationship between board characteristics and
financial performance of the listed manufacturing firms in Kenya. This study
adopted a descriptiveresearch design. The target population for the study was13
manufacturing firms listed at the Nairobi Securities Exchange in Kenya during years
2009 to 2013. The study adopted the Survey Sampling Technique. The survey
measured the entire target population and a census was carried out so as to
systematically acquire and record information regarding secondary data on company
boards for each of the thirteen listed firms. The study used secondary data sourced
from the listed firms’ published annual reports and statistics. Secondary data
usedwas retrieved from manufacturing firms’ websites, Nairobi Securities Exchange
websites, Capital Markets Authority Library and Kenyan Investors website.The
study utilizedboth descriptive and inferential statistics to analyze the data. The study
estimated aPanelData Regression Model which was analysed using Stata 12. The
study findings were presented in tables to enable effective and efficient
interpretation.The study results indicated that board characteristics in regard to board
size, board diversity and board independence has a significant effect on the financial
performance of listed manufacturing firms in Kenya. The results also showed that
firm attributes has a significant moderation effect on the relationship between board
characteristics and financial performance. Based on the research findings, the study
proposed that the listed manufacturing firms in Kenya should stick to the
recommendedboard size, board diversity and board independence as the study found
a significant relationship between board characteristics and financial performance.
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CHAPTER ONE

INTRODUCTION

1.1Background of the Study

Manufacturing sector is one of the key pillars to economic development. The sector

remains a critical force in both advanced and developing economies. Globally, the

manufacturing output as measured by gross value added continues to grow by about

2.7 percent annually in advanced economies and 7.4 percent in large developing

economies. The sector contributes from 10 percent to 33 percent of value added

(United Nations Industrial Development Organisation [UNIDO], 2013). Economies

such as China, India and Indonesia have risen into the top ranks of global

manufacturing and in the world’s fifteen largest manufacturing economies

(Mckinsey Global Institute [MGI], 2012). In fact, China is the largest manufacturing

economy in the world, with a 22 percent share of manufacturing activity. The USA

is in second place with a 17.4 percent share of manufacturing activity(Manufacturers

Alliance for Productivity and Innovation [MAPI], 2014).

In Africa, the manufacturing sector is widely considered to be the ideal industry to

drive Africa’s development. The Africa Progress Panel (2014) also identifies some

degree of manufacturing development as a prerequisite for sustained high economic

growth on the continent. The continent produces only 1.5 percent of the world’s

manufacturing output (World Bank, 2012). Also, manufacturing only accounts for

around 25% of exports in Sub-Saharan Africa, lower than any other region except

the Mediterranean Africa (World Economic Forums [WEF], 2013a).

In Eastern Africa, the manufacturing sector plays a key role in economic

transformation and development. Despite improvements over the past 15 years, the

contribution of manufacturing to GDP in the region has remained relatively low and
 2

manufacturing value added (MVA) per capital still is lower than the African

average. The sector also contributes a relatively small share of GDP ranging from

3.8 percent to 11 percent, in the region (African Development Bank [AfDB], 2014).

The manufacturing sector in Kenya is relatively strong when compared to countries

that are in a similar phase of economic development. The country is one of the top

exporters of manufactured goods in the Sub-Saharan Africa region(KPMG,

2014).This is as a result of the ambitious development targets set up by theKenyan

government so as to enhance economic growth in the manufacturing sector.The

Kenyan government first developed the vision 2030 on October 2007, which

required a 10 percent increase in economic growth rate per annum from the

manufacturing sector (Republic of Kenya, 2007). Then the government formed the

Second Medium-Term framework, which was concerned with making Kenya a

newly industrialized middle-income country by the year 2030 (Kenya Industrial

Research and Development Institute [KIRDI], 2011). Later on, the Kenyan

government came up with the Millennium Development Goals (MDGs) that sought

to enhance the transformation of Kenya into a rapidly industrializing, middle income

nation by the year 2030 (Purhonen&Mburu, 2010).

Despite the efforts of the Kenyan government to set up policies that seek to improve

the manufacturing sector, the sector which is the backbone of vision 2030 has

stagnated (World Bank, 2014). Further, the sector’s contribution to GDP declined

from 9.6 percent in 2011 to 9.2 percent in 2012, while the growth rate deteriorated

from 3.4 percent in 2011 to 3.1 percent in 2012 (Kenya National Bureau of Statistics

[KNBS], 2013a).Therefore, to speed up growth in Kenya’s manufacturing sector,

substantial investment is required (Bigsten, Peter & Mans, 2010). This can be

attained through professionalizing boards thus requiring the listed firms to comply
 3

with the CMA guidelines on board composition (Capital Market Steering Committee

[CMSC], 2014).

1.1.1 Financial Performance in the Manufacturing Sector

Manufacturing sector remains a significant contributor to financial performance of

both advanced and developing economies. Manufacturing represents 16 percent of

global GDP and manufacturing value added grew from 5.7 trillion dollars to 7.5

trillion dollars between 2000 and 2010 (MGI, 2012).Generally, manufacturing

accounts for only 13 percent of GDP in Africa. This is a smaller share compared to

other regions except the Middle East and North Africa (World Bank, 2012).

However, the continent has also experienced a significant increase in manufactured

exports and import-substituting production over the past decade and is poised to

continue this strong performance (KPMG, 2014).

Manufacturing in Eastern Africa is limited. The contribution of manufacturing to

GDP and employment is small in the region. The sector contributes a relatively

small share of GDP ranging from 3.8 percent to 11 percent (AfDB, 2014).In Eastern

Africa, Kenya is relatively strong when compared to other countries. The Kenyan

manufacturing value added per capita in constant 2005 US dollars, was 61.8 US

dollars in 2012, up 2.6 percent in real terms from 2005 (United Nations Industrial

Development Organisation [UNIDO], 2013). This is merely a fraction of South

Africa’s 2012 level of 910.9 dollars, but is much higher than that of regional peers

Tanzania, Uganda and Rwanda which have 41.4, 30.5 and 25.1 US dollars

respectively (UNIDO, 2013).

In addition, Kenya’s manufacturing constitutes 70 percent of the industrial sector

contribution to GDP (KIRDI, 2011). However, theformal manufacturing sector is

 4

small and trends are not promising. It contributed just 11 percent of Kenya’s GDP in

2013 and employed only 280,000 people which are equivalent to12 percent of the

2.3 million people in Kenya’s labor force (KNBS, 2013b). Besides, the sectors’

contribution to wage employment is on a declining trend. The total wage

employment gradually worsened from 13.9 percent in 2008 to 12.9 percent in 2012

(World Bank, 2014).

According to the World Development Indicators (2013), the production of Kenya’s

manufacturing exports has been slowly declining. Kenya’s manufacturing exports

represented about 0.02 percent of global manufacturing exports in 2013, down from

0.06 percent in 1994 and 0.18 percent in 1980s. In 2013, South Africa which is the

regional champion in manufacturing exports produced 0.03 percent of global

manufacturing exports, fifteen times more than Kenya. On the other hand, the share

of manufactured goods imported by the East African Community from Kenya

declined from 9 percent to 7 percent in 2013 (World Bank, 2014).

Nevertheless, there is still a lot of room for expansion in Kenya’s manufacturing

sector (KPMG, 2014). For this to happen, manufacturing firms should comply with

the corporate governance codes on Board composition for an effective, efficient and

stable corporation (CMSC, 2014). The corporate governance guidelines requirelisted

firms to professionalize theircorporate boards in terms of size, diversity and

independence (CMSC, 2014). A responsible, creative and innovativeBoard leads to a

credible, stable and sustainable corporation thatfacilitates the creation and

production of wealth, generation of adequate employment opportunities and

investment opportunities which in turn promoteincreased financial performance,

economic growth, employment and taxation (Capital Markets Authority [CMA],

2015).
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1.1.2 Corporate Governance and Financial Performance

Well structured corporate governance is the key to success of a company. Corporate

governance is important because the quality of corporate boards impacts the

efficiency with which a corporation employs assets and is able to attract low-cost

capital thus improving its overall financial performance (Holly & Marsha, 1999).

Effective corporate governance promotes the efficient use of resources both within

the firm and the large economy. When corporate governance systems are effective,

debt and equity capital should flow to those corporations capable of investing it in

the most efficient manner for the production of goods and services most in demand

and with the highest rate of return. In this regard, effective governance helps protect

and grow scarce resources which in turn increase financial performance of a

corporation(Holly & Marsha, 1999).

For corporations to succeed in competitive markets, firm’s management should be

separate and distinct from the providers of the firm’s capital.Therefore, the firm

should have a strong board which acts as a bridge between the managers and the

shareholders (Cadbury Commission, 1992).Ensuring that corporations do so,

promotes effective corporate governance which assists firms in attracting lower-cost

investment capital by improving both domestic and international investor confidence

that assets will be used as agreed, whether that investment is in the form of debt or

equity (Mckinsey, 1996).Also, strong corporate governance is important to a firm’s

successful economic performance as well as its ability to attract long-term, stable,

low-cost investment capital (Holly & Marsha, 1999).

It is therefore necessary to point out that the responsibilities and functions of the

corporate board in both developed and developing economies are receiving greater

attention as a result of the increasing recognition that a firm’s corporate governance

 6

affects both its economic performance and its ability to access patient, low-cost

capital (Holly & Marsha, 1999). After all, the board of directors is the corporate

organ designed to hold managers accountable to capital providers for the use of firm

assets (Holly & Marsha, 1999).The concept of corporate governance of very large

firms has been a priority on the policy agenda in developed market economies for

over a decade. The concept is gradually warming itself as a priority in the African

continent. Indeed, it is believed that the poor performance of the corporate sector in

Africa has made the issue of corporate governance a catchphrase in the development

debate (Berglof& Von, 1999).

There are several events that are responsible for the heightened interest in corporate

governance especially in both developed and developing countries (Ranti, 2011). In

developed countries for instance, a string of collapses from high profile corporations

such as Lehman Brothers, J.P Morgan, Morgan Stanely and others, fraudulent

activities, several major corporate scandals and long lasting economic depression

raised the questions on the suitability of the existing corporate governance practices

of business firms in the economy (Mazudmer, 2013).

In developing countries such as Kenya, corporate governance framework has also

continued to weaken (Mang’unyi, 2011). In fact, according to the World Economic

Forum (2013b)corporate governance framework in Kenya has lagged behind other

countries.This is due to company’s failure to comply with current rules on the issue

of board composition requirements (CMSC, 2014). Therefore, as a result of poor

corporate governance,Kenya’s large companies such as Unga Group and CMC

Motors have experiencedweak financial performancethereby resulting to corporate

failures(Madiavale, 2011).
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1.2 Statement of the Problem

The manufacturing sector in Kenya plays a significant role in the economic

development. The sector is key to the achievement of the Kenya vision 2030. Over

the years the manufacturing sector has declined. Manufacturing sector activity, as

measured by the Federal Board’s industrial production index, grew by just 2.3

percent in 2013, down from 3.9 percent in 2012 (MAPI, 2014). In Kenya, Real

growth in the manufacturing sector averaged 4.1 percent per annum during 2006 to

2013, lower than the average annual growth in overall real GDP of 4.6 percent

(KNBS, 2013a). As a result, the manufacturing sector’s share in output,declined in

recent years. The financial performance of manufacturing firms in Kenya over the

past seven years depreciated, with manufacturing growth of 4.1 percent significantly

lagging overall economic growth of 5.0 percent (World Bank, 2014).Thesector’s

contribution to GDP declined from 9.9 percent in 2009 to 9.8 percent in 2010.

Subsequently, the GDP worsened from 9.6 percent in 2011 to 9.2 percent in 2012,

while the growth rate deteriorated from 4.5 percent in 2010 to 3.4 percent in

2011and thereafter to 3.2 percent in 2012 (KNBS, 2014).

Despite the Kenya’s vision 2030 industrial strategy to double the share of

manufacturing output to 20 percent, growth in the manufacturing sector has

stagnated (World Bank, 2014).The share of manufacturing sector in GDP has

stagnated at about 10 percent with the sector’s growth during the first Medium Term

Plan being a mere 3.16 percent (Kenya Institute for Public Policy Research

[KIPPRA], 2013). Besides, the benchmarks for financial performance reviewed by

the Nairobi Securities Exchange (2013) indicate that listed manufacturing firms’

overall financial performance on a year to year basis has been depreciating. For

instance, the market shares for most of the listed manufacturing firms reflect a
 8

decline in their prices leading to a decrease in the firms’ market capitalization (NSE,

2013). Further, according to financial performance analysis by NSE (2013), most

firms such as East African Portland Cement, Eveready East Africa and Mumias

Sugar show very strong negative percentages for their R.O.A and R.O.E. The weak

financial performance is attributed tolow investments (Bigstenet al., 2010) caused

byweak corporate governance practices in Kenya (CMSC, 2014).The weak

corporate governance practice is as a result ofcompanies’ failure to comply with

current rules on the issue of board composition requirements (CMSC, 2014).

While there is a strong belief that corporate governance is vital to firm financial

performance especially at board level, empirical evidence have not done pretty well

in providing the much needed support in this regard. There has been discrepancy in

findings due to empirical definitions, conceptualizations and methodologies adopted

by various studies (Lawal, 2012). For instance, the studies by Muigai (2012), Charas

(2014) and Victor et al., (2014) find a significant relationship between board

characteristics and financial performance. However, other studies (Raymond et al.,

2010; Horvath &Spirollari, 2012)are inconclusive as they found limited support that

board characteristics is significantly related to financial performance. Different from

other corporate governance studies (Raymond et al., 2010; Muigai, 2012; Horvath

&Spirollari, 2012; Charas, 2014; Victor et al., 2014), this studynot only examined

the direct relationship between board characteristics and financial performance, but

also took into account the unobserved characteristics of the firm ignored by previous

studies. The studyimproved on conceptualization and methodology by incorporating

firm attributes as the moderating variable in the model and employing panel data for

a five year period rather than relying only on cross-sectional data.

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1.3 Objectives of the Study

The general objective istoascertain the effect of board characteristicson financial

performance of manufacturing firms listed atthe Nairobi Securities Exchange in

Kenya.

The Specific objectives include;

1. To establishthe effect of board sizeon financial performance of

manufacturing firms listed at the Nairobi Securities Exchange in Kenya.

2. To examine the effect of board diversity on financial performance of

manufacturing firms listed at the Nairobi Securities Exchange in Kenya.

3. To ascertain the effect ofboard independenceonfinancial performance of

manufacturing firms listed at the Nairobi Securities Exchange in Kenya.

4. To determine the moderating effect of firm attributes on the relationship

between board characteristics and financial performance of manufacturing

firms listed at the Nairobi Securities Exchange in Kenya.

1.3.1 Hypotheses of the Study

HO1:Board size has no effect on financial performance of manufacturing firms listed

at the Nairobi Securities Exchange in Kenya.

HO2: Board diversity has no effect on financial performance of manufacturing firms

listed at the Nairobi Securities Exchange in Kenya.

HO3: Board independence has no effect on financial performance of manufacturing

firms listed at the Nairobi Securities Exchange in Kenya.

HO4:Firm attributes has no moderatingeffect on the relationship between board

characteristics and financial performance of manufacturing firms listed at the

Nairobi Securities Exchange in Kenya.

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1.4 Significance of the Study

The findings of this study could be useful in many fields. One potential beneficiary

of the findings is the Capital MarketsAuthority of Kenya. The policy makers in the

Kenyan government could use the findings of the study in developing additional

corporate governance policies, guidelines and regulations to govern manufacturing

firms. The economic policy changes made could play a vital role in underpinning the

integrity and efficiency of financial markets through increasing investors’

confidence and thereby securing access to capital through the stock market. This

could provide avenues for opening investment opportunities in the capital market for

both local and foreign investors resulting to significant improvements in economic

growth.

Another potential beneficiary of the findings is the manufacturing sector. The

finding of the study couldpromote good corporate governance practices in

manufacturing firms which couldin turn increasetheir access to external

financingleading to larger investment, higher growth and greater employment

creation. In addition, adoption of an effective corporate board could lead to better

operational performance through better allocation of resources, hence creating more

wealth. Promotion of good corporate governance in manufacturing firms could also

lower the cost of capital and the associated higher firm valuation thus creating more

investments attractive to investors which could lead to more growth and

employment, therebypromoting economic stability and the achievement of the

Kenyan vision 2030 industrial strategy to double the share of manufacturing output

to 20 percent.

The findings of the study are of practical relevance to the investors who entrust their

investment to management. The investors could use the study to devise or enhance
 11

monitoring and control mechanism to management. They could gain insight on the

various structures of governance relating to the corporate board of directors and

hence make practical interpretation in relation to the nature of operations in their

organizations.

Finally, the findings of this study are of possible beneficiary to the academicians.

The academicians could use the study as a reference material and further apply the

knowledge gained from the study for further research in developing appropriate

theories and principles in the corporate governance aspect of board characteristic

and financial performance.

1.5 Scope of the Study

The scope of the study was limited to only the manufacturing firms which are listed

at the Nairobi Securities Exchange. The period concerned for the study was 2009 to

2013. This period was considered important because it was the period reflecting the

declining trend in the financial performance of manufacturing firms in Kenya

(World Bank, 2014).The financial performance aspect only covered one market

based measure namely the Tobin’s Q and two accounting-based measures namely

the Return on Equity and Return on Asset.

1.6 Organization of the Study

The first chapter of the study was the Introduction.The chapter presented the

background of the study which provided thebasic information relating to corporate

governance and financial performance in themanufacturing sector. It also contained

the statement of the problem, the objectives of the study, the hypothesis of the study,

the significance of the study and the scope of the study.

 12

The second chapter of the study isthe Literature Review.It presents the theoretical

review which discusses the financetheories relating to corporate governance and

financial performance. The chapter also contains the empirical review, the summary

of literature review, the knowledge gap and the conceptual framework.

The third chapter of the study is the Methodology. It contains the introduction, the

research philosophy, the research design, the target population, the sampling design

and sample size determination. The chapter also presents the data collection

instruments, the data collection procedure, the empirical model and the ethical

considerations observed by the researcher.

The fourth chapter is the Empirical Results, Interpretation and Discussion. The

chapter presents and explains both the descriptive statistics and inferential statistics

for the findings of the study. It also analysesand presents the study findings on the

basis of the research objectives and hypotheses. The chapter uses tables and figures

to present quantitative data so as to enable effective and efficient interpretation of

the research findings.

The fifth chapter of the thesis isthe Summary, Conclusion and Recommendations. It

is the final chapter of the study. It provides a summary of the study findings,

conclusions drawn from the findings, limitations of the study, recommendations for

practice and the areas for further research.

 13

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presents reviewed literature relating to corporate governance and

financial performance. Also,presented are theoretical literature, empirical literature

and the knowledge gap.

2.2 Theoretical Literature

The study wasguided by theories relating to corporate governance and financial

performance including Agency Theory, Stakeholders Theory and Resource

Dependency Theory. The main theory on which the study is anchored wasAgency

Theory.

2.2.1 Agency Theory

Agency theory was formedin 1973 by Stephen Ross and Barry Mitnick (Mitnick,

1973).Creation of the theory was due to separation of ownership and control which

leads to an agency problem whereby management operates the firm aligning with

their own interests, not those of the shareholders (Jensen &Meckling, 1976). Agency

theory states that, due to separation of ownership and control in modern

corporations, there is often a divergence of interests between the principal and the

agent (Hoskissonet al., 1999). Besides, Agency theoristsacknowledged the crucial

role of board as an instrument of owners in subduing the opportunistic behavior of

managers so as to effectively address the agency problem (Stiles & Taylor,

2001).For that reason, managers must be controlled using monitoring mechanisms

that observe their deviant behaviors (Filatachevet al. 2007). Since agency theory has

undoubtedly dominated other theories as the most preferred approach to corporate

 14

governance studies,the composition of the board is considered an important element

in resolving agency problems(Johnson, 2008; Aguilera et al., 2008).

Agency theory advocated for a clear separation between decision management and

control (Fama& Jensen, 1983). Therefore, boards which have separated the positions

of the Chair and CEO are considered independent as such an arrangement dilutes the

power of the CEO and increases the board’s ability to effectively perform its

oversight role (Fama& Jensen, 1983; Boyd, 1995). However, mere separation may

not be clear indication of independence of the board. Hermalin and Weisbach (1998)

suggest that board independence depends on the CEO’s bargaining position, which

is effectively derived from their perceived ability. Some of the internal mechanisms

recommended to address the presumed conflict of interest in agency theory, is the

need for a greater representation of outside independent non-executive directors and

larger board sizes (Hesterly& Coles, 2000; Bhagat& Black, 2002;Petrovic, 2008).

Large boards are viewed to negatively impact performance since theyare less

effective and less easy for a CEO to control and they interfere with group dynamics

and decisions (Jensen, 1983). Nonetheless agency theory advocated for larger boards

as it viewed the presence of non-executive directors on the board as a crucial

element in ensuring that the managers will act in the best interests of shareholders.

The general expectation is that non-executive directors, being independent and

having the expertise to carry out their function, will be able to monitor executive

directors (Fama& Jensen, 1983). Larger boards also allow for effective monitoring

by reducing the domination of the CEO within the board and protect shareholders’

interests (Singh &Harianto, 1989).The independence of a board is fundamental to

the best interests of shareholders. Therefore, agencytheorists advocated the need for
 15

non-executive directors as they can best represent the shareholder interests (Carter,

Simkins& Simpson, 2003).

2.2.2 Stakeholder Theory

The stakeholder approach was originally proposed in the mid-1980 by Richard

Edward Freeman. The theory recognized the fact that firms do not operate in

isolation but within an environment made of different interest groups aside the

immediate owners. It therefore, expanded the interested parties’ spectrum as it

argued the need to take into consideration the interests of other constituents in

corporate decision making since they are likely to affect or be affected by firms’

strategic choices (Freeman, 1984). Therefore, maintaining harmonious corporate

relationship with each group is of high strategic importance to the firm and its ability

to add value as well as the marketplace (Kreitner, 2002).

Firms through its administrators (board and management) have the sole

responsibility of aligning diverse interest groups by effectively analysing the nature

of their perceivedinterest disparities and the adoption of appropriate corporate

strategies that help balance the act and improve financial performance (Freeman,

1984).The interests of these stakeholders according to Donaldson and Preston (1995)

are intrinsically bond. Therefore, maintaining harmonious corporate relationship

with each group is of high strategic importance to the firm and its ability to add

value as well as the delivery of success in the marketplace (Kreitner, 2002). Under

this theory, the purpose of firm shifts from pursuing shareholder value maximisation

to that which encompasses other stakeholders’ expectations (Kirkbrideet al., 2004).

In order to enhance board effectiveness and performance, the stakeholder theory

advocated for large and well diversified corporate board sizes that accommodate and
 16

facilitate the alignment of the interest of each constituent especially those that create

value to the firm (Evan & Freeman, 1993; Clarkson, 1995; John &Senbet, 1998;

Zingales&Rajan, 1998).On the contrary, Donaldson and Muth, (1998) emphasize the

need for smaller board sizes. This is in line with

organisationalbehaviourists’argument that small teams promote group cohesiveness

and bonding that propel high performance.

2.2.3 Resource Dependence Theory

The Resource Dependence Theory developed in the 1970’s by Pfeffer and Salancik

(1978) emphasizes that resources required by organizations need to be acquired

through a network of contacts and that efficiency in bridging network gaps will

determine the quality of corporate performance. The theory provides a theoretical

foundation for the role of the board of directors as a resource to the firm (Johnson et

al., 1996; Hillman et al., 2000). The perspective of Resource Dependence Theory is

that, outside directors bring a stream of resources such as information and skills to

the firm (Hillman et al., 2000). Corporate boards are part of the resource stream

since they bring bundles of knowledge, experience, ideas and professional contacts

(Carpenter, Gelektkancyz& Sanders, 2004).

Board diversity isanchored on Resource Dependence Theory since it can lead to

broader corporate networks (Siciliano, 1996) and improve financial performance

(Waddock& Groves, 1997). Board members with higher qualifications wouldthus

ensure an effective board, which requires high levels of intellectual ability and

experience (Hilmer, 1998).Besides, qualified and skillful board members are

strategic resources that provide a strategic linkage to different external resources

(Ingley& Vander Walt, 2001). Therefore, resource dependence theory acknowledges

corporate board diversityin terms of both demographic (gender, age and ethnicity)
 17

and cognitive elements such as the professional and educational qualifications

(Erhardtet al., 2003;Kang et al., 2007).

In response to resource dependencies and regulatory pressures, organisations create

large boards to encompass directors from different backgrounds (Pfeffer, 1972;

Pearce & Zahra, 1992).Klein (1998) for instance suggests that advisory needs of the

CEO increases with the extent to which the firm depends on the environment for

resources. So, increasing board size links the organisation to its external

environment and secures critical resources. The resource dependency perspective

therefore, is that large boards are chosen to maximise the provision of important

resources to the firm (Klein, 1998; Hillman &Dalziel, 2003).

2.3 Empirical Literature

This study reviewed empirical literature relating to the corporate governance aspect

of board characteristics and financial performance. For this study, the variables on

board characteristics were reviewed in relation to board size, board diversity and

board independence.

2.3.1 Corporate Governanceand Financial Performance

Among other factors, corporate governance has been identified as having influence

on financial performance. An element of corporate governance believed to affect

firm financial performance is board characteristics. Empirical studies undertaken

indicate support to various propositions of board characteristics to firm financial

performance. For instance, Bathulah (2008) using a sample of 156 listed firms in

New Zealand, found a positive relationship between board characteristics and firm

performance. However, the results of the study cannot be termed as decisive, since

the study used board size which is a component of board characteristics as the
 18

moderating variable. Unlike Bathulah (2008) thisstudy employed a moderator

variable which is unrelated to board characteristics variable.

On the contrary, studies have also produced conflicting results. For instance, a study

by Raymond et al., (2010) was inconclusive as the researcher only found limited

support that board composition significantly influenced financial performance. This

was probably because the data used was based on cross-sectional data. However,

this study used panel data so as to ensure more generalized results. Similarly, the

study by Horvath and Spirollari (2012) in the US, certainly conflict most researches

on corporate governance and financial performance. The study found board size,

board independence and gender diversity to have no significant effect on financial

performance. However, different from Horvath and Spirollari (2012) this study

adopted both cross-sectional and time series data so as to avoid results based on

relying solely on cross sectional data.

The study by Charas, (2014) on the impact of board dynamics on shareholder value

creation reports a direct and statistically significant relationship between director

characteristics and corporate profitability. These findings can be termed as

immaterial since the study took a direct relationship approach which is too simplistic

and narrow minded for it portrayed corporate governance as a differentiator rather

than a qualifier. Different from Charas, (2014) this study incorporated the

moderation effect of firm attributes and determined both the direct relationship and

the moderation effect. On the other hand, the study by Azar, Rad and Betyari (2014)

in Malaysia found a negative relationship between board independence and Tobin’s

Q.Nonetheless, the study did not take into account the accounting-based measures of

financial performance. Unlike Azaret al., (2014), this study determined financial
 19

performance not only from use of Tobin’s Q measure, but also by use of two

accounting-based measures of financial performance namely R.O.A and R.O.E.

2.3.2Board Size

Board size refers to the number of directors in the board. It is an important factor to

determine the effectiveness of the board. The code of corporate governance in

Kenya requires Boards’ of public listed companies to have sufficient sizes. The

Boards should be of such a number that enables the requirements of the company’s

business to be met (CMA, 2002).Also, the size of the Board should not be too large

to undermine an interactive discussion during board meetings or too small such that

the inclusion of wider expertise and skills to improve the effectiveness of the Boards

is compromised (CMA, 2002).

Although many studies have examined the relationship between board size and firm

performance, the findings are inconclusive.For instance, Raymondet al., (2010)

asserts that board size is positively related to revenue growth but is negatively

related to financial leverage. Also, a study in Kenya by Muigai (2012) found a

negative relationship between board size and financial performance which supported

the conclusion of Jensen (1983) that for a firm to be effective in monitoring, it

should have a relatively small board. In relation to that, Mehranet al., (2011) argued

that a large board reduced the value of a firm because of free rider problems. The

same conclusion was drawn by Kaid and Mohammed (2012) based on their study

carried out on listed companies in Kuwaiti Stock Exchange. The study concluded

that board size had a negative relationship with performance measured by ROA.

On the contrary, there are studies which supported the positive relationship between

board size and firm performance. A study in Kenya by Wetukha (2013) found a
 20

positive relationship between board size and performance in firms listed at the NSE

in Kenya. These results also supported the findings made by Mahrous (2014)

regarding the association between board size and firm performance.The study

byMahrous (2014) found board size to have a significant effect on a firm’s financial

performance. However, different from previous studies, this study incorporated both

the direct relationship and the moderation approach to validate results on the

relationship between board size and financial performance. Therefore, the study

conceptualized firm attributes as the moderating variable.

2.3.3Board Diversity

Board diversity is one of the mostsignificant elements of board characteristics in

modern corporations. The code of corporate governance in Kenya provides that

Boards’ of public listed companies should have a policy to ensure the achievement

of diversity in their composition (CMA, 2002). Further, the law requires that every

Board should consider whether its size and diversity makes it effective. Diversity

applies to academic qualifications, technical expertise, relevant industry knowledge,

experience, nationality, age, race and gender (CMA, 2002). A diverse Board

therefore, is capable of excercing objective and independent judgement (CMSC,

2014). The reason being, most individual board members often have the knowledge

and experience that is required to advice management in the light of the

particularities of the company, its business and the competitive environment

(Chartered Financial Analyst Institute [CFA], 2005).

Significant numbers of prior empirical studies have used various diversity variables

to examine the relationship between board diversity and financial performance.

However, the results are inconclusive. For instance, the study by Salim (2011) on

board diversity and firm performance in Indonesia, whereby ROA and Tobin’s Q
 21

were used as performance measures, found a negative relationship between gender

diversity and financial performance. Similarly, Mizraet al., (2012) yields the same

results. The study examined the relationship between gender diversity and firm

performance variables of ROA and EPS and found a negative relationship between

women in top positions of the firm and financial performance. However, Horvath

and Spirollari (2012) reports contradicting results. The study found gender diversity

to have no significant effect on financial performance. On the other hand, a study in

Kenya by Wetukha (2013)finds a negative relationship between gender diversity and

ROE. The contradicting results are as a result of reliance on solely cross-sectional

data. Unlike the previous studies, this study employed panel data for a time frame of

five years so as to validate the results.

Prior empirical studies on the effect of diversity variable of age of directors’ on

financial performance have different findings. Rondoyet al., (2006) found no effect

between age diversity and financial performance in Scandinavian countries.

Engelenet al., (2012) finds a hyperbolic relationship between age diversity and

company performance in the Netherlands. This means that age diversity will

increase financial performance, but until a certain point. From that point, more age

diversity will decrease financial performance. On the other hand, Mahadeoet al.,

(2011) found no positive effect of age diversity on financial performance alone.

However, the study did find a positive relationship between age diversity and

financial performance when combined with other variables of diversity, namely;

age, educational background and independence in a corporate context. The

conflicting results are due to neglect of the unobserved effect of firm characteristics.

This study incorporated firm attributes as the moderating variable in order to take
 22

into account both the direct relationship approach and moderation approach for more

generalized results.

Empirical research linking board diversity variable of directors’ educational

qualifications to financialperformance is mixed and mostly uses cross-sectional data.

For instance, a study by Bathulah (2008) finds a negative relationship between board

members with PhD level of education and performance. This is inconsistent with the

findings of Cheng et al., (2010).The study found that university degrees held by the

board chairman are positively associated with EPS, ROA, cumulative returns,

cumulative abnormal returns and market-to-book ratio. Raymond et al., (2010)

reports contradicting results. The study shows a negative relationship between

proportion of board members with education expertise and revenue growth.

However, Darmadi (2011) shows that board members’ educational qualifications are

significantly related to ROA and Tobin’s Q. This study however, looked at the

proportion of board members with degree qualification, over an extended timeline,

regressed against both the accounting and market based measures of financial

performance.

Prior studies examining the relationship between diversity variable of directors’

expertise and performance mostly focus on the financial sector and their findings are

contradictory. For instance, a study by Fernandes and Fitch (2009) defined expertise

as the average years of experience of directors in the financial sector and the

findings were a significant positive relationship between financial expertise and

stock performance.However, Minton et al., (2010) reports that financial expertise is

negatively related to stock market performance. This is consistent with the findings

of Aebiet al., (2012) whose results suggest a negative relationship between financial

expertise of non-executive directors and bank performance. Different from these

 23

studies, this study focused on the manufacturing sector and employedboth the

market-based and accounting-based measures of financial performance to increase

on the validity of the data, for more accurate results.

Past studies examining the relationship between diversity variable of directors’

nationality and performance mostly focus on developed countries and do not take

into account the unobserved characteristics of the firm. For instance, Shukeri, Shin

and Shaari (2012) in Malaysia found a positive relationship between ethnic diversity

and ROE. Similarly, the study by Victor et al., (2014)in Europe yields the same

results. The study found foreign directors to be positively related to financial

performance. However, unlike previous studies, this study focused on a developing

country and incorporated the unobserved effect of firm characteristics, whereby firm

attributes was used as the moderating variable.

2.3.4 Independenceof the Board

The law requires that Boards’ of public listed companies should comprise of a

balance of executive directors and non-executive directors of diverse skills or

expertise in order to ensure that no individual or small group of individuals can

dominate the Boards’ decision making processes (CMA, 2002). Also, Boards’ are

required by law to have a non-executive chairperson and separate roles for the

chairman and the CEO (CMA, 2002). In this case, the Board is considered

independent, hence effective. However, a Board that is not predominantly

independent may more likely make decisions that unfairly or improperly benefit the

interests of management. These decisions may also be detrimental to the long-term

interests of shareowners (CFA, 2005).

 24

Previous studies examining the relationship between board independence and firm

financial performance have been inconsistent. For instance, Armer, Ragab and

Ragheb (2014) in a study of 50 companies reported that there was no significant

relationship between board independence and financial performance. Though the

importance of independent directors should not be put to doubt, the outcome of this

study conflicts with the conventional wisdom which suggests that a Board’s

principal task is to monitor management and only independent directors’ can be

effective monitors (Adams &Mehran, 2012). Therefore, the study by Armeret al.,

(2014)is largely skewed to the position of Agency Theory on the monitoring role of

the board which roots for outside director representation.

In general, while providing support to existing theories, studies also produce

conflicting evidence. Minton et al., (2010) does not find a positive association

between board independence and firm performance. Similarly, Sekhar (2013) finds

that the proportion of non-executive directors has a negative influence on ROA.

However, the findings contradict Mahrous, (2014) in the study of 50 companies in

Egypt. The study established a positive relationship between proportion of non-

executive directors and financial performance measured by ROA and ROE.

Likewise, subsequent studies (Victor et al., 2014; Waithaka, Gakure&Wanjau,

2014) showed a positive relationship between board independence and financial

performance. These results are actually consistent with the implication of Agency

theory literature.However, unlike these studies, this study measured board

independence not only from the commonly used perspective which is the proportion

of non-executive directors on the board, but also from the viewpoint of separate

roles for the CEO and the chairperson of the board.

 25

2.3.5 Moderating Effect of Firm Attributes

There is evidence that firm attributes influence the firm’s choices of internal

governance mechanism especially with respect to financial performance measures

(Karuna, 2009). Firm attributes refer to characteristics inherent in a firm that falls

outside the direct control of a firm such as organizational size, age and structure.This

study usedsize, age and asset structure of the firm, as indicators for the moderating

variable of firm attributes.

Firm size has been measured as Natural logarithm of total assets (Shao, 2009). Other

studies measure firm size by the number of employees (Raymond et al., 2010) and

sales or market capitalization (Baptista, 2010). The resource dependency theory

argues that as the size increases, more resources are available to the firm (Waithaka,

2013). Besides, Fama and Jensen (1983) demonstrated that firm size is an indicator

of complexity and could make a greater degree of monitoring necessary.Therefore,

this study usedfirm size as a one of the moderating variables of firm attributes, so as

to determine how it influences the direct link between board characteristics and

financial performance.

Firm age refers to the number of years for which a firm has been in operation. The

age of a company has been identified in prior literature as a trait having a likely

impact on corporate governance (Dibia&Onwuchekwa, 2013). Inuwaet al., (2015)

states that the older the firms, the greater the likelihood for them to have strong

internal control mechanisms. The age of the company has also an ambiguous effect

on company performance. It is argued that older firms are more efficient than

younger firms, hence a higher financial performance (Namita&Bharti, 2015).This

study used firm age as one of the moderating variables of firm attributes so as to
 26

determine how it influences the direct link between board characteristics and

financial performance.

One indicator of firm structure is the assets in a firm. Asset structure has been used

in previous studies as a proxy for firm characteristics. For instance, the study by Wu

and Li (2015) on board independence and the quality of board monitoring in

Chinaused asset structure as a proxy for firm characteristics. According to Wu and

Li (2015), the assets of a firm, may capture the difficulty in the directors’ monitoring

of the CEO since the higher the proportion of assets in a firm, the more complicated

is managing the firm. This study thus usedasset structure as a proxy for firm

attributes so as to determine its moderating effect on the relationship between board

characteristics and financial performance.

2.4 Summary of Literature Reviewed and Research Gaps

While most international (Raymond et al., 2010; Harvoth&Spirollari, 2012; Azaret

al., 2014; Charas, 2014; Victor et al., 2014) and Kenyan (Muigai, 2012;Wetukha,

2013; Waithakaet al., 2013) empirical studies, have examined the direct relationship

between board characteristics and financial performance very few studies (Bathulah,

2008; Kholeif, 2008) have considered the effect of moderating variables. Many

scholars recently called for investigation of moderating effects in studies linking

corporate governance to firm performance (Finkelstein & Mooney, 2003; Letendre,

2004; Carpenter et al., 2004; Pye& Pettigrew, 2005). Besides, Carpenter et al.,

(2004) concluded that researches done on corporate governance should not ignore

the role of intervening variables for them to be acceptable or publishable.

In addition, Borsch-Supan and Koke (2002) suggest that all the studies on Corporate

Board Characteristics should use panel data and at the same time to take into
 27

consideration the unobserved firm characteristics variables. This study therefore,

incorporated the moderating variable of firm attributes and determinedboth the

direct approach and the moderation approach for the relationship between board

characteristics and financial performance. This studyfurther employedboth the

accounting-based and market-based measures of financial performance and used

panel data for a time frame of five years so as to validate the results.

Further, thisstudyprovides the summary of literature reviewed in Table 2.1 so as to

clearly bring out the research gaps. The table shows the author for a specific study

similar to a research like this one, the thematic area of that study and the findings

retrieved from the study being reviewed.

Author Thematic Area Findings Research Gap Focus of Current Study

Raymond et al., Influence of corporate boards on firm Board size positively related to revenue growth Use of only accounting - Uses both accounting-
(2010) financial performance in the new era and negatively related to financial leverage. based measures of based and market-based
of Sarbanes-Oxley (SOX). Board education and financial expertise financial performance measures of performance.
negatively related to revenue growth. No moderation effect. Has Moderation Effect.
Muigai, (2012) Relationship between Selected Significant relationship between Board Results are limited to the Focuses on manufacturing
Corporate Board Dynamics and Dynamics and Financial Performance. Financial Sector. sector.
Financial Performance of the Board Composition and Board Size are No moderation Effect. Moderation effect.
Commercial Banks in Kenya. negatively related to ROA. Is a cross-sectional study. Use of Panel Data.
Wetukha, (2013) The relationship between Board Board Independence and Board Size are No moderation effect. Has moderation Effect.
Composition and Financial positively related to financial performance. Used cross-sectional data Employs Panel Data and
Performance of Listed Firms at the Gender diversity is negatively related to ROE Relys on accounting- uses both accounting and
Nairobi Securities Exchange. and ROA. based measures. market-based measures.
Waithakaet al., The Effect of Board Characteristics Board Size and Board Independence are Focuses on financial Focus on manufacturing
(2014) on Performance of the Microfinance positively related to performance. institutions. sector, uses panel data and
Institutions in Kenya. Is a cross-sectional study. has a moderation effect.
28

Mahrous , The effect of Board Characteristics Board size and non-executive directors are Assumes a direct Incorporates moderation
(2014) on the Financial Performance of positively related to ROA and ROE. relationship. effect of firm attributes.
firms in the Egyptian Stock Firm size positively related to ROA and ROE. Based on cross-sectional Employs Panel Data,
Exchange. Firm age negatively related to ROA and ROE. data. hence a longitudinal study.
Armeret al., Board Characteristics and Firm Positive relationship between proportion of Board independence Board independence also
(2014) Performance: Evidence from Egypt. independent directors and performance (ROE) measured only as non- indicated as split chair &
Board independence has no significant executive directors. CEO role.
relationship with Tobin’s Q. No moderation Effect. Has moderation Effect.
Table 2.1:Summary of Literature Reviewed and Research Gaps

Azar et al., Board Characteristics and Firm Independent directors are negatively related to Assumption of a direct Incorporates a moderating
(2014) Performance in Malaysia. performance (Tobin’s Q). effect. variable.
Is a cross-sectional study. Employs Panel Data.

Victor et al., Board Characteristics best practices Significant relationship between board No moderation effect. Has a Moderation effect.
(2014) and Financial Performance in characteristics and company performance. Is a cross-sectional study. Employs Panel Data.
Europe. Board independence and foreign directors’ Findings may not hold in Focuses on developing
proportion, positively related to performance. a developing country. country, Kenya.
 29

2.5 Conceptual Framework

This study used the conceptual framework in figure 2.1 to demonstrate an

understanding of which variable in the study influenced which. The conceptual

framework comprised of independent variables, dependent variables and moderating

variables.

Independent Variables Dependent Variable

Board Characteristics

HO1 Financial
Board Size

- Number of directors Performance

 Tobin’s Q

Board Diversity  R.O.E

HO
-Age
2  R.O.A

- Gender

- Educational Qualification
HO
- Professional
4 Expertise

- Nationality Firm Attributes

- Size
Board Independence
- Age
- Non-Executive Directors
- Asset Structure
- Split Chair & CEO role
HO3

Moderating Variable
Figure 2.1:A conceptual framework on effect of Board Characteristics on the
Financial Performance of listed manufacturing firms in Kenya.

Source: (Author, 2016)

 30

The Figure 2.1was the conceptual framework for this study. The conceptual

framework showed both a direct and indirect relationship between board

characteristics and financial performance. The direct relationship represented the

direct link between board characteristics and financial performance. Board

Characteristics was the independent variable which comprised three variables

namely; board size, board diversity and board independence. The conceptual

framework implied that the number of directors in a board, their age, gender,

educational level, professional expertise and nationalityhave an effect on the

financial performance of a firm. The framework also showed that board

independence is portrayed by the presence of non-executive directors on the Board

and the separation of roles of the CEO and the Chairperson. According to the

framework, these features of board independence affect the financial performance of

a firm.

The figure 2.1 also depicted that the direct link between board characteristics and

financial performance was influenced by the moderating variable, firm attributes.

Therefore, the relationship between board characteristics and financial performance

depend on the attributes of the firm indicated by size, age and asset structure.This

means that the attributes of a firm affect the direction and strength of the relation

between the independent variables and dependent variable. Thus, the moderation

effect depicted in figure 2.1 portrays the firm attributes as the unobserved conditions

under which the relationship between board characteristics and financial

performance exist. Hence,those attributes of a firm can cause variations on the

relationship between board characteristics and financial performance.

 31

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the general approach of the study. It describes the research

tools employed and the methods used in the data collection process. The chapter

focuses on the research design, population target, sample size, data collection

method, empirical model, data analysis and ethical considerations employed by the

study.

3.2 Research Philosophy

The study used the PositivismResearch Philosophy.This philosophy is based upon

values of reason, truth and validity and there is a focus purely on facts, gathered

through direct observation and experience andmeasured empirically using

quantitative methods, surveys, experiments and statistical analysis (Hatch

&Cunliffe, 2006). The positivism research paradigm is most suitable for a study like

this one since the research is a quantitative study and thus involves testing of the

hypothesis developed from the existing theories relating to board characteristics and

financial performance (Flowers, 2009).

3.3 Research Design

Research design is the blueprint for the collection, measurement and analysis of data

(Cooper & Schindler, 2008). This study adopted a descriptive research design. The

descriptive research design was considered appropriate since it helped provide

answers to the questions of who, what, when, where, and how associated with the

particular research problem (Cooper & Schindler, 2008). Besides, the descriptive

research design enabled the researcher obtain information on financial performance

 32

of listed manufacturing firms and thereafter describe their performance with respect

to board characteristics variables of size, diversity and independence.

3.4 Model Specification

For the purpose of testing the relationship between board characteristics and

financial performance, the study designed a general Panel Data Regression Model

similar to the one used by Thaoet al., (2014) so as to combine time series for several

cross-sections. The regression equation 3.1 enabled the study analyse repeated

observations on fixed units (Pennings, Keman&Kleinnijenhuis, 1999).

Consequently, the regression model aided the study combine cross-sectional data on

the 13 listed manufacturing firms in Kenya (N) and the five year time period from

2009 to 2013 (T) so as to produce a dataset of N*T observations. This means that,

instead of testing a cross-section model for the 13 listed manufacturing firms at one

point in time or testing a time series model for one firm using time series data, the

Panel Data Regression Model is tested for all firms through time (Penningset al.,

1999). From the general regression model 3.1, the study designed three Panel Data

Regressions for Tobin’s Q, ROEand ROA Models.

Since this study incorporated a moderating variable, according to Baron and Kenny,

(1986) an equation thatregresses the independent variables against the dependent

variable while controlling for moderating variable firm attributes, was designed so

as to ascertain the moderation effect. Similarly, the study by Ongoreet al., (2015)

incorporated the moderating variable in the regression model in order to determine

the moderation effect on the relationship between the independent and dependent

variable. Therefore, given this preamble, the study designed the Panel Data

Regression Model 3.5to help test for moderation effect of firm attributes. Similar to
 33

the regression model 3.1 the regression model 3.2 aidedthis study in combining both

cross-section data and time series data.

General Model: Yit =β0 +βiXit+εt............................................................................3.1

Tobin’s Qit =β0 +β1X1it+β2X2 it+β3X3 it+β4X4 it+β5X5 it+β6X6 it+β7d1it+εt................3.2

ROE it =β0 +β1X1it+β2X2 it+β3X3 it+β4X4 it+β5X5 it+β6X6 it+β7d1it+εt........................3.3

ROA it =β0 +β1X1it+β2X2 it+β3X3 it+β4X4 it+β5X5 it+β6X6 it+β7d1it+εt........................3.4

Yit=β0+β1X1it+β2X2it+β3X3it+β4X4it+β5X5it+β6X6it+β7d1it+β8Z1Z2 Z3it+εt..................3.5

Where:-

Y – Financial Performance measured by Tobin’s Q, ROE and ROA at time

period t.

X1 – Board Size measured by number of board members at time period t.

X2 – Age measured by average age of board members at time period t.

X3 – Gender diversity measured by proportion of female directors in the Board at

time period t.

X4 – Educational qualification measured by proportion of directors with at least

degree at time period t.

X5 – Professional expertise measured by proportion of directors with expertise in

finance at time period t.

X6 – Nationality measured by proportion of foreign directors’ in the Board at

time period t.

d1– Board independence is a dummy coded as 1 if a firms’ Board at the time

period t comprises of at least half non-executive directors and the position of the

CEO and chairperson are separate, if otherwise, it is coded as 0.

Z1 – Age of the firm at time period t.

 34

Z2 – Size of the firm at time period t.

Z3 – Asset Structure of the firm at time period t.

Z1Z2Z3it– Composite index for moderator variable firm attributes, given as the

product term of firm age (Z1), firm size (Z2) and asset structure (Z3) at time t.

β0 and βi – Are the parameters or vectors of parameters.

εt – Is the error term.

t – Is the time period.

3.5 Target Population

Target population is the specific population about which information is desired

(McDaniel, 2001). The target population for the study was the 13 manufacturing

firms listed at the NSE in Kenya during the years 2009 to 2013. The study used the

listed manufacturing firms since information on their company boards’ and financial

performance is readily available as the listed firms are governed by the Capital

Markets’ Authority code of corporate governance hence requiring them to publish

their annual reports and financial statements.

Table 3.1: Target Population

No. Listed Manufacturing Firms in Kenya during 2009 to 2013

1 B.O.C Kenya Ltd
2 BAT Ltd
3 Carbacid Investments Ltd
4 East African Breweries Ltd
5 Mumias Sugar Ltd
6 Unga Group Ltd
7 Bamburi Cement
8 Athi River Mining Ltd
9 KenGenLd
10 Crown Paints Kenya Ltd
11 East African Cables Ltd
12 East African Portland Cement
13 Eveready East Africa
Source: KAM, 2014; NSE, 2013
 35

The table 3.1 shows the thirteen listed manufacturing firms in Kenya used as the

target population for the study. The period concerned for the target population was

2009 to 2013. This period was considered important because it was the period

reflecting the declining trend in the financial performance of manufacturing firms in

Kenya (World Bank, 2014).

3.6 Sampling Designand Sample Size Determination

Sampling is the procedure a researcher uses to gather people, places or things to

Study (Kombo& Tromp, 2006). Thus, a sample design is a definite plan for

obtaining a sample for a given population (Mugenda&Mugenda, 2003). The study

adopted the Survey Sampling Technique. The survey measured the entire target

population of the thirteen firms and a census was carried out so as to systematically

acquire and record information regarding secondary data on company boards for

each of the listed firms from 2009 to 2013.

3.7 Data Collection Instruments

This study employed secondary data since it can be examined over a longer period

of time. Secondary data was retrieved from the manufacturing firms’ websites, the

NSE library and the NSE websites.The study sourcedsecondary data on financial

performance and firm attributes from the published official reports of the listed

companies which entailed the annual financial reports and statistics. Secondary data

relating to board characteristics wasspecifically obtained from thepublished annual

reports to shareowners andthe annual proxy statements to shareowners.The study

used the document review guide template in Appendix 1and the data collection sheet

in Appendix 2 to collect and recordthe data.

 36

3.8 Data Collection Procedure

A research authorization permit was first obtained from the Ministry of Education,

Science and technology prior commencing the data collection process. The

researcher also regestered online with the NSE, CMA and the Kenyan Investors

websiteso as to download annual reports and financial statements from year 2009-

2013, for each of the thirteen listed manufacturing firms in Kenya. Theresearcher

obtained data relating to board characteristics from the firms’ published annual

reports retrieved from the firms’ websites, NSE, CMA and Kenyan Investors

websites’.The annual financial reports downloaded contained directors’ biographical

information relating to age, gender, education, expertise and nationality.

Thereafter, the researchersourced secondary data on financial performanceand firm

attributes from the listed manufacturing firms’ financial statements available online.

The study used the NSE website to source data on share prices and market

capitallization for each firm from year 2009 to 2013. The study also used the NSE

Handbook (2013) and the annual reports downloads from the firms’ website, CMA

website and Kenyan Investors website to obtain data on various measures of

financial performance and firm attributes. Each data collected was recorded in the

secondary data collection sheet and template. The data was colleceted in a period of

two months.

3.9 Operationalization and Measurement of Variables

This section identifies and provides the operationalized independent, dependent and

moderator variables in the study. These variables are operationalized based on how

they have beenused in this study. The study variables’ operationalized are provided

bytable 3.2.

Table 3.2: Operationalization and Measurement of Variables

 37

Variable Variable Indicator Operationalization

Type Name
Dependent Financial Return on Profit After Tax *100
Variable Performance Equity Shareholder’s Equity
Return on Profit After Tax *100
Asset Total Assets
Tobin’s Q Market Capitalization
Total Assets
Board Size Number of Total Number of Board Members at firm
board i in year t.
members.
Age Average age of board members at firm i,
in year t (%)
Independent Gender Proportion of female board members at
Variable Board firm i, in year t (%)
Diversity Educational Proportion of board members with degree
Qualification and above at firm i, in year t (%)
Professional Proportion of board members with
Expertise expertise in finance at firm i, in year t (%)
Nationality Proportion of foreign directors in the
board at firm i, in year t (%)
Non-
Board Executive If at least half are non-executive directors
Independence Directors and positions of CEO and Chairperson at
firm i, in year t, are separated = 1
Split Chair Otherwise = 0
and CEO
role
Age Number of years between observation
Moderating year and year of listing
Variable Firm Size Total Sales
Attributes Total Assets
Asset Non-Current Assets*100
Structure Total Assets

3.10 Diagnostic Tests

Diagnostic tests assist in verifying the nature of the data and aids in specifying the

model applicable for the study in order to ensure that the regression results are

unbiased, consistent and efficient (Yihua, 2010). This study carried out relevant

diagnostic tests before embarking on model estimation. The diagnostic tests were
 38

designed to check the assumptions relating to the ordinary least squares (OLS) panel

regression model. The diagnostic tests relevant for this study were tests concerned

with testing for violation of panel error assumptions relating to normality,

heteroskedasticity, autocorrelation and multicollinearity.

3.10.1Testing for Normality

An assumption of the OLS regression model that impacts the validity of all tests is

that residuals behave normal(Oscar, 2007). Thisstudy usedthe Shapiro Wilk test, a

non-graphical test for normality, so as to determine whether residuals behaved

normally. The Shapiro Wilk test was used to test the null hypothesis that the

distribution of the residuals was normal (Oscar, 2007). If the p-value was found

greater than 0.05 (p>0.05), the study would fail to reject the null (at 95%) and

thereafter conclude that the residuals were normally distributed.

3.10.2 Testing for Heteroskedasticity

Heteroskedasticity refers to regression disturbances whose variances are not constant

across observations (Greene, 2008). Heteroskedasticity arises in numerous

applications, in both cross-section and time-series data thus causing the estimation

results to be inefficient (Baltagi, 2005). This study chose the Breusch- Pagan test to

test for heteroskedasticity.The null hypothesis is that residuals are homoskedastic.

Therefore, if the F statistic strongly rejects the null at least at 90% or 95% level of

significance, this implies presence of heteroskedasticity.

According to Stock and Watson (2003)there are two ways to deal with the problem

of heteroskedasticity, one is the use ofheteroskedasticity-robust standard errors, and

the other is the use of the weighted least squares. However the heteroskedasticity-

robust standard errors method is the most preferred (Stock & Watson, 2003). This
 39

study chose the heteroskedasticity-robust standard errors, so as to deal with the

problem of heteroskedasticity if found present.

3.10.3Testing for autocorrelation

Time-series data often displays autocorrelation or serial correlation of the

disturbances across periods(Green, 2008). Serial correlation is problematic to linear

panel datamodels because its presence renders the standard errors biased as well as

making theestimated regression coefficients consistent but inefficient (Drukker,

2003; Baltagi, 2005).Therefore,to detect the presence of autocorrelation, the study

opted for the Durbin-Watson Test. The Durbin-Watson statistic is a test of First

Order Autocorrelation between the error and its immediate previous value (Brookes,

2008). The test aids todetermine whether the errors in different observations are

correlated with each other (Brookes, 2008). The null hypothesis in Durbin-Watson

test is that there is no serial correlation (Durbin &Watson, 1971). If the d-statistic is

more than 0.05, the study fails to reject the null (at both 95% and 90% significance

level) and conclude that the errors in different observations are not correlated with

each other(Durbin &Watson, 1971).

3.10.4Testing for Multicollinearity

According to Kumari (2008), the existence of a linear relationship among the

independent variables is called multicollinearity. Multicollinearity can cause large

forecasting error and make it difficult to assess the relative importance of individual

variables in the model.This study opted forboth the Variance Inflation Factor (VIF)

and Tolerance to test for multicollinearity. The Tolerance Statistics values of below

0.10 (1/vif< 0.10) would indicate a problem with multicollinearity (Oscar,

2007).The studyalso opted for reciprocal of Tolerance also known as Variance

Inflation Factor (VIF) to check for multicollinearity.The variance inflation factor

 40

shows how much the variance of the coefficient estimate is being inflated by

multicollinearity (Belsley, Edwin & Roy, 1980). Therefore, a Variance Inflation

Factor more than 10 (vif> 10) would indicate trouble with multicollinearity (Oscar,

2007).

3.11 Data Analysis and Presentation

Firstly, the data from the data collection instruments were compiled and edited in

Excelspreadsheet using an acceptable format to enable data analysis by STATA 12.

The data was then transferred from Excel to Stata econometric software for analysis.

This study used Stata for data analysis because the software has ability to analyse

panel data in a range of time and since the study used panel data for a five year

period, the software was most appropriate for the study (Cameron &Triredi, 2009).

The researcher then analysed the descriptive statistics for each of the study variables

so as to get their mean, standard deviation, minimum and maximum values.

Afterwards, the researcher run the Pearson’s correlation analysis in Stata, so as to

get the pairwise correlation matrix which helped determine the direction and

strength of the relationship between the study variables. The researcherthereafter,

run the OLS regression models with Tobin’s Q, ROE and ROA as the dependent

variables, for both the direct effect and the moderation effect, so as to test the fitness

of the models by use of the F-statistics.The results for the F-statistics were used to

gauge whether the OLS models were fit for analysis.

Thereafter, the study carried out diagnostic tests for each of the OLS regression

models so as to test whether the econometric assumptions relating to the OLS

regression were met. The study constructed non-graphical tests forhomoskedasticity,

multicollinearity, normality and autocorrelation. The problem of heteroskedasticity

 41

found presentin the OLSregression models for the direct effect, was dealt with by

use of the Robust Standard ErrorsTechnique. The OLS regression models for both

the direct effect and moderation effect where then estimated and their results

presented in tables for efficient interpretation.

Finally, the researcherused the results obtained from the estimated OLS regression

models to test the research hypothesis of the study.The researcher tested hypothesis

for both the direct and moderated OLS regression models so as to determine the

strength of the relationship between the study variables. Afterward the study gave a

comprehensive summary of the estimated regression results in tables for easy

interpretation of the findings.

3.12 Ethical Consideration

The researcher undertook cautious measuresto ensure that the study adhered to

ethical research standards. Prior the data collection process, the researcher obtained

a research authorization permit from the Ministry of Education,Science and

Technology. The researcher then regestered online with the CMA, NSE and Kenyan

Investor websites through creating an online member regestration account that

allowed access to relevant data via downloads of the firms’ information on board

characteristics and financial statements.

 42

CHAPTER FOUR

RESEARCH FINDINGS AND DISCUSSION

4.1 Introduction

This chapter presents the empirical results, interpretation and discussions. The study

results are presented on the basis of descriptive, correlation and regression based on

the objectives and study hypotheses.

4.2 Descriptive Statistics

This section provides the summary of descriptive statistics of the study variables.

Descriptive statistics are a collection of measurements which determine the location

and variability of the variables used in a study(Torres, 2009).Thestudy results were

on the basis of mean, standard deviation, maximum and minimum of the values

obtained from analysis of the study data. The mean was used to show the central

value of the study variable while the standard deviation provided the variability or

spread of the study data from the centre value. The maximum and minimum were

used to give the highest and lowest values respectively.

The variables for the study were board characteristics, financial performance and

firm attributes. The summary of descriptive statistics for board characteristics

averaged for the five year period 2009 to 2013 is shown by table 4.1.
 43

Table 4.1: Descriptive Statistics for Board Characteristics

Board Characteristics Obs. Mean Std.Dev. Min. Max.

Board Size 65 8.369231 2.950473 4 15
Board Diversity
Age 65 60.62409 5.051748 48 74
Gender - Female 65 21.36772 8.648525 10 50
Education-at least 65 60.60369 17.33495 20 87.5
degree 65 38.26009 19.29208 7.692307 75
Financial Expertise 65 30.45645 14.36547 6.666667 60
Nationality – Foreign
Board Independence
Board Independence = 0 65 .5384615 .5023981 0 1
Board Independence = 1 65 .4615385 .5023981 0 1
Source: (Researcher, 2016)

One of the indicators of Board characteristic was board size. Board size was

measured by the total number of directors on the Board. The results indicated by

table 4.1 shows that, on average, there are 9 directors that serve on the Board. The

minimum number of directors on the Board is 4 while the maximum number is 15.

The code of corporate governance in Kenya provides that Boards’ should be of

sufficient sizes so as to enable the requirements of the company’s business to be

met. Therefore, Boards’ should not be too large such that they undermine an

interactive discussion during board meetings or too small such that the inclusion of

wider expertise and skills to improve the effectiveness of the Board is compromised

(CMA, 2002).

Board characteristics were also analysed on the basis ofboard diversity indicated by

age, gender, education, financial expertise and nationality. The results indicated by

table 4.1 show that on average, the mean age of directors stands at 61 years. The

youngest director is 48 years old while the oldest is 74 years old.

Most Boards are dominated by male since on average the proportion of female

directors as shown by table 4.1 was 21 percent with a minimum of 10 percent and
 44

maximum of 50 percent. However, this was a high percentage as compared with

other countries. For instance, the survey of GMI Ratings 2013 reveals that in 5,977

largest and famous corporations in 45 countries around the world, women only

occupy 11 percent Board seats. In developed markets, female directors only account

for 7.4 percent (Gladman& Lamb, 2013).

According to the results shown by the table 4.1, majority of directors hold at least a

degree. The proportion of directors with at least a degree was 60.6 percent with a

minimum and maximum of 20 percent and 87.5 percent respectively. However, on

average, only 38 percent of directors had financial expertise with a standard

deviation of 19.29 percent. The minimum and maximum proportion of directors’

with financial expertise stood at 7.69 percent and 75 percent respectively.

Nationality was analysed on the basis of the proportion of foreign directors in the

Board.The proportion of foreign directors on the Board was 30.45 percent with a

standard deviation of 14.36 percent. The minimum number of foreign directors was

6.66 percent while the maximum was 60 percent. This is an indication that most

Boards are pre-dominated by non-foreign directors who comprise on average, the

remaining 69.55 percent.

The other variable for board characteristics was board independence which was

measured as a dummy variable equal to 1 if at least half of directors on the Board

were non-executive directors and the positions of CEO and chairperson were

separated. The results indicated by table 4.1 show that 46.15 percent of Boards

comprise of majority of non-executive directors and have separated the positions of

the CEO and chairperson, hence independent.

 45

Financial performance was analysed on the basis of Tobin’s Q, ROE and ROA

measures of performance. The summary of descriptive statistics for financial

performance averaged for the five year period 2009 to 2013 is shown by table 4.2.

Table 4.2: Descriptive Statistics for Financial Performance

Financial Performance Obs. Mean Std. Dev. Min. Max.

Tobin’s Q 65 1.406592 1.143106 .0547247 4.903372
ROE 65 14.60571 10.94752 -6.973202 48.54795
ROA 65 13.77783 11.1499 -6.086088 46.79987
Source: (Researcher, 2016)

One measurement for financial performance of manufacturing firms is Tobin’s Q.

The result indicated by the table 4.2showsan average mean of 1.406592 witha

standard deviation of 1.143106, which indicates large variationsfor Tobin’s Q. The

average mean is greater than 1 implying that most firms are earning a rate of return

that is larger than their replacement cost. In this case therefore, it would entice

market participants to set up similar companies in order to earn higher than the

replacement cost value causing an increase in competitions. However, the minimum

value is 0.0547247 which is less than 1 implying that the market value is lesser than

the replacement cost which would mean that the respective company is trading

undervalued. Thus, it would be better for corporate raiders or competitors to buy the

firm rather than set up a similar company.

Another measurement for financial performance of manufacturing firms is ROE.

The results indicated by table 4.2 show that ROE has a minimum value of -6.973202

percent with a maximum value of 48.54795 percent, an average mean of

14.60571percentand a standard deviation of 10.94752 percent. The average mean

of14.60571percent is an indication of a high ROE which means that most firms have

an efficient management that uses investors’ money effectively leading to growth of

the companies’ value. However, the minimum value for ROE -6.973202
 46

percentshows the ineffectiveness of the respective firms’ management in utilizing

the investors’ money to grow the company’s value.

Financial performance was also measured byROA. The results shown by table 4.2

indicated a minimum value of -6.086088 percent with a maximum of 46.79987

percent, an average mean of 13.77783 percent and a standard deviation of 11.1499

percent. The average mean of 13.77783 percent is an indication of a high ROA

meaning that most firms are able to efficiently make profits from their assets

regardless of size. It shows a solid financial performance for the firms. However, the

minimum value for ROA -6.086088 gives the investors’ the impression that the

respective firm’s management is inefficient.

The firm attributes were analysed for firm size, firm age and asset structure. The

results are provided by table 4.3.

Table 4.3: Summary of Descriptive Statistics for Firm Attributes

Firm Attributes Obs. Mean Std. Dev. Min. Max.

Age 65 41.07692 6.897254 31 60
Size 65 1.07128 .8389935 .349032 3.426716
Asset Structure 65 57.95516 20.27983 20.28903 96.67374
Source: (Researcher, 2016)

One of the indicators of firm attributes analysed isage of the firm. The results

indicated in table 4.3 show that the average age of the firms’ stand at 41 years dated

from the year of listing to the year of observation. The youngest firm is 31 years old

while the oldest firm is 60 years old. The average age of the firms implies that over

the last 41 years firms have opted to get listed in order to raise funds to finance their

operations which means the need for stronger Boards’ which would in turn increase

the firms’ financial performance.

 47

Another attribute of a firmanalysedis size of the firm which was measured by the

ratio of total sales to total assets. The table 4.3 shows that firm size has an average

mean of 1.07128 with a standard deviation of 0.839935, a minimum of 0.349032

and a maximum of 3.426716. Since the firms’ sizes are large, the more complex are

the firms’ hence requiring a greater degree of monitoring to enable availability of

more resources to the firms’ leading to increased financial performance.

Firm attributes was also proxied in terms of asset structure. The results indicated by

table 4.3 show that the average asset structure for the firms’ measured as a

percentage of non-current assets to total assets stands at 57.95516 percent with a

standard deviation of 20.2783 percent, a minimum of 20.28903 percent and

maximum of 96.67374 percent. The high percentages of asset structure capture the

difficulty in the director’s monitoring of the CEO since the higher the proportion of

assets in a firm, the more complicated is managing the firm, hence requiring stronger

Boards.

4.3 Correlation Analysis

Correlation analysis was carried out so as to check the direction and strength of the

relationship between two continuous variables. The Pearson’s Correlation was

constructed for the relationship between the study variables. The correlation result

on the relationship between Tobin’s Q and board characteristics inclusive of the

moderating variables of firm attributes is indicated by table4.4.

 Tobin Board Board gender Educati- financial National Firm Firm Firm
Q Size Age female on at expertise ity- Age Size Asset
least foreign Structure
degree

Tobin’s Q 1.000

Board Size 0.1039 1.000

Board Age 0.1741 - 1.000

0.2990*
**
Gender - 0.0447 0.0465 0.1707 1.000
female

Education - 0.0542 0.0750 0.3183 1.000

at least 0.0549 *
degree
48

**
Financial 0.1770 - 0.3370 0.1308 0.3232* 1.000

*: p< 0.05 **: p<0.1Source: (Researcher, 2016)

Expertise 0.5253* * **
** **
Nationalit 0.4124 -0.1849 - - -0.1017 -0.1543 1.000
y- foreign * 0.2182 0.0555
** **
Firm Age 0.7847 0.2381 0.0237 0.1323 0.1905 0.2474* 0.2942* 1.000
* ** ** **
**
Firm Size 0.4043 0.1781* 0.0948 0.0063 0.1340 0.0262 0.1017 0.62838 1.000
* ** *
** **
Firm
Table 4.4: Correlations of the Variables: Tobin’s Q as Dependent Variable

0.1599 0.3853* 0.0518 0.0650 -0.0519 -0.1997 - 0.0458 - 1.000

Asset ** 0.4612* 0.1400
Structure **

Implying that, financial performance measured by Tobin’s Q increases as the

number of foreign directors on the Board increases. The study results areconsistent
The results indicated bytable 4.4 show a weak positive correlation between Tobin’s

Q and foreign nationality. The findings indicated that at 10% level of significance r

= 0.4124 with a p-value less than 0.1while at 5% the p-value was less than 0.05.
 49

with the study by Victor et al.,(2014) which found a positive correlation between

foreign directors and financial performance.

The results in table 4.4show a positive correlation between moderating variables of

firm attributes and financial performance. There exists a strong positive correlation

between Tobin’s Q and firm age. The findings indicated that at 10% level of

significance r=0.7847with a p-value less than0.1 while at 5% the p-value was less

than 0.05, hence significant. Signifying that theTobin’s Q of a firm increases as

firmage increases. Likewise, the correlation between Tobin’s Q and firm size is

positive though moderate.The findings indicated that at 10% level of significance

r=0.40430 with a p-value below 0.1 and at 5% the p-value was below 0.05, hence

significant. This implies that Tobin’s Q increases as the size of the firm increases.

Correlation analysis was also carried out on the other indicator of financial

performance which was ROE. The correlation results for the relationship between

ROE and board characteristics inclusive of the moderator which is firm attributes are

provided by table 4.5.

 ROE Board Board Gender Education Financial Nationality- Firm Firm Firm
Size Age femle at least expertise foreign Age Size Asset
degree Structure

ROE 1.000

Board Size 0.2205 1.000

Board Age 0.1683 -0.2990* 1.000

**
Gender- 0.0592 0.0465 0.1707 1.000
female

Education- at 0.0232 0.0542 0.0750 0.3183* 1.000

least degree **
50

Financial 0.1431 -0.5253* 0.3370* 0.1308 0.3232* 1.000

*: p< 0.05 **: p<0.1Source: (Researcher, 2016)

Expertise ** ** **

Nationality- 0.2919* -0.1849 -0.2182 -0.0555 -0.1017 -0.1543 1.000

foreign ** **

Firm Age 0.7568* 0.2381 0.0237 0.1323 0.1905 0.2474* 0.2942* 1.000
** ** ** **

Firm Size 0.4751* 0.1781* 0.0948 0.0063 0.1340 0.0262 0.1017 0.62838 1.000
** ** *
Table 4.5: Correlations of the Variables: ROE as Dependent Variable

**
Firm Asset 0.2578* 0.3853* 0.0518 0.0650 -0.0519 -0.1997 -0.4612* 0.0458 -0.1400 1.000
Structure ** ** **
 51

The results indicated by table 4.5 show a weak positive correlation between ROE

and board size. The results indicated that at 10% level of significance r = 0.2205

with a p-value not exceeding 0.1 and at 5% level of significance the p-value was

below 0.05, hence significant. Hence,financial performance increases with increase

in board size. The correlation results are consistent with Wetukha (2013) whose

study found a positive correlation between board size and financial performance.

Foreign nationality was also found to have a weak positive correlation with ROE.

The findings in table 4.5 show r = 0.2919 with a p-value below 0.1at 10% level of

significance and a p-value not exceeding 0.05 at 5% level of significance.This

implies that financial performance increases with increase in the number of foreign

directors on Board. The results are consistent with Victor et al.,(2014) whose study

found a positive correlation between foreign directors and financial performance.

The results in table 4.5 indicate a positive correlation between firm attributes and

financial performance. There exists a strong positive correlation between ROE and

firm age. The results show r = 0.7568 with a p-value less than 0.1 at 10%

significance level and a p-value not exceeding 0.05 at 5% significance level.

Implying that, ROE increases as the age of a firm increases. Similarly, the findings

show that the correlation between ROE and firm size is positive though moderate.

The results indicate r = 0.4751with a p-value below 0.1 at 10% significance level

and a p-value not exceeding 0.05 at 5% significance level. This means that as the

size of the firm increases, ROE increases. On the other hand, the correlation between

asset structure and ROE although positive is weak. The findings show r=0.2578 with

a p-value of less than 0.1 at 10% significance level and a p-value below 0.05 at

5%significance level, hence significant. Meaning that, as the asset structure of a firm

increases, the ROE of the firm also increases.

 ROA Board Board Gender Education Financial Nationality- Firm Firm Firm
Size Age female at least Expertise foreign Age Size Asset
degree Structure

ROA 1.000

Board Size 0.1403 1.000

Board Age 0.1537 -0.2990* 1.000

**
Gender 0.0441 0.0465 0.1707 1.000
femae

Education- 0.1063 0.0542 0.0750 0.3183* 1.000

at least **
degree
52

Financial 0.2682* -0.5253* 0.3370* 0.1308 0.3232* 1.000

*: p< 0.05 **: p<0.1Source: (Researcher, 2016)

Expertise ** ** ** **

Nationality- 0.3597* -0.1849 -0.2182 -0.0555 -0.1017 -0.1543 1.000

foreign ** **

Firm Age 0.7435* 0.2381 0.0237 0.1323 0.1905 0.2474* 0.2942* 1.000
** ** ** **

Firm Size 0.4303* 0.1781* 0.0948 0.0063 0.1340 0.0262 0.1017 0.62838 1.000
** ** *
**
Table 4.6: Correlations of the Variables: ROA as Dependent Variable

Firm Asset 0.1264 0.3853* 0.0518 0.0650 -0.0519 -0.1997 -0.4612* 0.0458 -0.1400 1.000
Structure ** **
characteristics inclusive of the moderator, firm attributes are provided by table 4.6.
was ROA. The correlation results for the relationship between ROA and board
The othercorrelation analysed was on the indicator of financial performancewhich
 53

The results indicated by table 4.6 show a weak positive correlation between ROA

and financial expertise. The results indicated r = 0.2682 with a p-value less than 0.1

at 10% significance level and a p-value below 0.05 at 5% level of significance.

Implying that, as the number of directors with financial expertise in a Board

increases, the ROA of the firm also increases. The study finding is consistent with

the study by Fernandes and Fitch (2009) which found a positive correlation between

financial expertise and financial performance.

However, the correlation between ROA and foreign nationality was positiveand

moderate. The results in table 4.6 show r = 0.3597 with a p-value not exceeding 0.1

at 10% level of significance and a p-value less than 0.05 at 5% significance level.

Implying that,as the number of foreign directors in a Board increases, the ROA of

the firm also increases. The study results are consistent with the study by Victor et

al., (2014) which found a positive correlation between foreign directors and

financial performance.

The results shown in table 4.6indicate a positive correlation between moderating

variables of firm attributes and financial performance. There exists a strong positive

correlation between ROA and firm age. The findings show r = 0.7435 with a p-value

below 0.1 at 10% level of significance and a p-value less than 0.05 at 5%

significance level, hence significant. Signifying that,ROA increases as firm age

increases. Similarly, the correlation between ROA and firm size is positive though

moderate. The results indicate r = 0.4303with a p-value not exceeding 0.1 at 10%

level of significance and a p-value less than 0.05 at 5% significance level, hence

significant. Implying that ROA increases as firm size increases.

 54

4.4 Regression Analysis Results

Regression analysis was carried out to determine the strength of the direct

relationship between board characteristics and financial performance. The OLS

regression models with Tobin’s Q, ROE and ROA as the dependent variable were

estimated so as to test for the fitness of the models. The F-statistics was used to test

the overall significance of the models and determine whether they were fit for

analysis. The null hypothesis is that the regression coefficients are equal to zero.

Table 4.7 shows the F-statistics for the estimated models.

Table 4.7: Test of Fitness of the OLS Regression Models

Tobin’s Q ROE ROA

F(7, 57) = 14.17 F(7, 57) = 5.77 F(7, 57) = 12.43

Prob> F= 0.0000 Prob> F = 0.0000 Prob> F = 0.0000

Source: (Researcher, 2016)

The study results of the analysis indicated the Prob>F= 0.000 for each of the pooled

OLS regression models with Tobin’s Q, ROE and ROA as the dependent variables.

Since the Prob> F = 0.000 is less than 0.05, the study rejects the null hypothesis that

the regression coefficients are equal to zero. Therefore, the pooled OLS regression

models with Tobin’s Q, ROE and ROA as the dependent variables were fit for

analysis.

Further diagnostic tests were carried out to check whether or not the assumptions

relating to the OLS regression models with Tobin’s Q, ROE and ROA as dependent

variables regressed against the independent variables were met. The tests conducted

included tests for homoskedasticity, multicollinearity, normality and autocorrelation.

 55

4.4.1 Testing for Homoscedasticity

The Breusch-Pagan test was constructed to test for heteroskedasticity in the OLS

regression models with Tobin’s Q, ROE and ROA as dependent variables. The test

was used todetermine whether the variance in the residuals was constant. The null

hypothesis is that residuals are homoskedastic.The results are presented by the table

4.8.

Table 4.8: Breusch - Pagan Test for Heteroskedasticity

Tobin’s Q ROE ROA

chi2(1) = 19.81 chi2(1) = 11.26 chi2(1) = 10.35
Prob> chi2 = 0.0000 Prob> chi2 = 0.0008 Prob> chi2 = 0.0013

Source: (Researcher, 2016)

The results for the Breusch- Pagan test in table 4.8 show the prob> chi2= 0.000 for

the OLS model with Tobin’s Q, prob> chi2= 0.0008for the OLS Model with ROE

andprob> chi2= 0.0013 for the OLS model with ROA which indicated presence of

heteroskedasticity. The study thus rejects the null hypothesis at both 90% and 95%

significance level and concludes that residuals are not homogeneous. Due to the

non-homogeneity of residuals, the Robust Standard Errors were used to deal with

heteroskedasticity.

4.4.2 Testing for Multicollinearity

The Variance Inflation Factor and Tolerance Statistics were used to test for

multicollinearity. A variance inflation factor greater than 10 (vif> 10) or Tolerance

Statistics less than 0.10 (1/vif< 0.10)indicates trouble with multicollinearity.

Theresults of the tests are shown by the table 4.9.

 56

Table 4.9: Variance Inflation Factor Test for Multicollinearity

Variable VIF 1/VIF

Nationality-Foreign 2.04 0.491022
Financial Expertise 1.93 0.518038
Board Size 1.79 0.559570
Board Independence 1.74 0.575291
Education at least degree 1.31 0.762554
Board Age 1.27 0.790083
Gender-Female 1.15 0.867911
Mean VIF 1.60
Source: (Researcher, 2016)

The results indicated by table 4.9 show that all the independent variables had

avariance inflation factor less than 10 (vif< 10) anda Tolerance Statistics greater

than 0.10 (1/vif> 0.10). The study therefore concluded that there was no trouble with

multicollinearity.

4.4.3 Testing for Normality

The Shapiro-Wilk test was constructed to check for normality so as to ensure that

the residuals in the model behaved normal. The Shapiro-Wilk test wasused to test

the null hypothesis that the distribution of the residuals was normal. The residuals

were indicated by the letters “t” for Tobin’s Q model, “e” for ROE model and “a”

for ROA model. The results are presented by the table 4.10.

Table 4.10: Shapiro-Wilk Test for Normality

Models Residuals Obs. W V Z Prob>Z

Tobin’s Q t 65 0.97237 1.602 1.020 0.15391
ROE e 65 0.97120 1.670 1.110 0.13348
ROA a 65 0.97138 1.659 1.097 0.13641
Source: (Researcher, 2016)

The results shown in table 4.10 indicatethe p-values of 0.15391, 0.13348 and

0.13641 for Tobin’s Q, ROE and ROA OLS regression models respectively. The p-

values are greater than 0.05 indicatingnormality. Therefore, the study failed to reject
 57

the null that residuals are normally distributed (at 95%significance level) and

concluded that the residuals behaved normally.

4.4.4 Testing for Autocorrelation

The Durbin-Watson test was carried out to detect the presence of autocorrelation.

The null hypothesis in Durbin-Watson test is that there is no serial correlation. Table

4.10 was used to present the results of the test.

Table 4.11: Durbin-Watson Test for Autocorrelation

Tobin’s Q ROE ROA

Durbin-Watson Durbin-Watson Durbin-Watson
d-statistic (8, 65) d-statistic (8, 65) d-statistic (8, 65)
= 0.7067275 = 0.783211 = 0.9514878
Source: (Researcher, 2016)

The results for the Durbin-Watson test indicated in table 4.11 show the d-statistics of

0.7067275, 0.783211 and 0.9514878 for Tobin’s Q, ROE and ROA models

respectively. Since the d-statistics are greater than 0.05, the study failed to reject the

null that there is no serial correlation (at 95% significance level)and concluded that

the errors in different observations were not correlated with each other.

4.5Regression Models Estimation

The OLS regression models with Tobin’s Q, ROE and ROA as the dependent

variables were estimated so as to determine the strength of the direct relationship

between board characteristics and financial performance.However, since the

Breusch-Pagan Test for homoskedasticity proofed the presence of heteroskedasticity

in the models, the study used the Robust Standard Errors so as to control for

heteroskedasticity. Theresults for the estimated OLS regression model with Tobin’s

Q, ROE and ROA as the dependent variables are presented by the table4.12.
 VARIABLES TOBIN’S Q ROE ROA

Coef. t P- Coef. t P- Coef. t P-

Value Value Value
Boardsize .1121082 3.27 0.020 1.278358 3.07 0.003 1.535968 3.87 0.000

Boardage .0503148 2.58 0.012 .4502603 2.52 0.015 .4784947 2.40 0.020

Source: (Researcher, 2016)

Gender -.5735325 -5.70 0.000 -.3501533 -4.63 0.000 -.3485936 -4.16 0.000

Educationatleastdegree .0238523 3.86 0.000 .015339 2.21 0.031 .0621017 2.16 0.036

Financialexpertise .0294747 6.18 0.000 .2560278 4.42 0.000 .2681635 4.87 0.000
58

Nationalityforeign .0664506 10.33 0.000 .5211994 6.67 0.000 .6209709 8.35 0.000
Table 4.12:Estimation of OLS Regression Models

Boardindependence .07621386 3.46 0.001 5.813143 2.15 0.036 5.299949 2.27 0.027

Constant -5.011742 -4.37 0.000 -78.78434 -6.94 0.000 -64.30886 -4.86 0.000

Observations 65 65 65

R-Squared 0.5837 0.4825 0.5826

Robust Standard errors in parentheses

 59

For the regression model with Tobin’s Q as the dependent variable, the results

indicatean R squared of 58.37 percent. This implies that board characteristics

explain 58.37 percent of the variance in Tobin’s Q.The p-values for board size

(P>|z|=0.020), board age (P>|z|=0.012), gender (P>|z|=0.000), education

(P>|z|=0.000), financial expertise (P>|z|=0.000), nationality (P>|z|=0.000)and board

independence (P>|z|=0.001) are less than 0.05 which means thatthese variables are

statistically significant in explaining Tobin’s Q.

According to the results in table 4.12, the regression model with ROE as the

dependent variable indicated an R squared of 48.25 percent. Implying that board

characteristics explains 48.25 percent of the variance in ROE. The p-values for

board size (P>|z|=0.003), board age (P>|z|=0.015), gender (P>|z|=0.000), education

(P>|z|=0.031), financial expertise (P>|z|=0.000), nationality (P>|z|=0.000)and board

independence (P>|z|=0.036) are less than 0.05, meaning that these variables are

statistically significant in explaining ROE.

The results for the regression model with ROA as the dependent variable indicated

by table 4.12 show an R squared of 58.26 percent. This means that board

characteristics explains 58.26 percent of the variance in ROA. The p-values for

board size (P>|z|=0.000), board age (P>|z|=0.020), gender (P>|z|=0.000), education

(P>|z|=0.036), financial expertise (P>|z|=0.000), nationality (P>|z|=0.000) and board

independence (P>|z|=0.027) are less than 0.05, implying that these variables are

statistically significant in explaining ROA.

4.6Regression Analysis Results for Moderation Effect

Regression analysis was conducted to determine the moderating effect of firm

attributes on the relationship between board characteristics and financial

 60

performance.The study used composite index firm attributes and integrated them

with board characteristics so as to show moderation. Further, the study carried out

diagnostic tests so as to check whether or not the assumptions relating to the OLS

regression models with Tobin’s Q, ROE and ROA as dependent variables regressed

against both the independent variables and the composite index firm attributes for

the moderating variableswere met. The tests conducted included tests

forhomoskedasticity, multicollinearity, normality and autocorrelation.

4.6.1 Testing for Homoscedasticity

The Breusch-Pagan testwas constructed to test for heteroscedasticity in the OLS

regression models with Tobin’s Q, ROE and ROA as dependent variables regressed

against both the independent variables and the moderating variables. The test was

used todetermine whether the variance in the residuals was constant. The null

hypothesis is that residuals are homoskedastic. The results of the test are presented

by the table 4.13.

Table 4.13: Breusch - Pagan Test for Heteroskedasticity

Tobin’s Q ROE ROA

chi2(1) = 0.04 chi2(1) = 2.59 chi2(1) = 0.01
Prob> chi2 = 0.8468 Prob> chi2 = 0.1074 Prob> chi2 = 0.9377

Source: (Researcher, 2016)

The results for the Breusch- Pagan test indicate the prob> chi2= 0.8468 for the OLS

model with Tobin’s Q, prob> chi2= 0.1074 for the OLS Model with ROE andprob>

chi2= 0.9377 for the OLS model with ROA which show the presence of

heteroskedasticity. The study thus failed to reject the null hypothesis (at both 90%

and 95% significance level) and concluded that the residuals were homogeneous.
 61

4.6.2 Testing for Multicollinearity

The Variance Inflation Factor and Tolerance Statistics were used to test for

multicollinearity. A variance inflation factor greater than 10 (vif> 10) or Tolerance

Statistics less than 0.10 (1/vif< 0.10) indicates trouble with multicollinearity. The

results of the tests are shown by the table 4.14.

Table 4.14: Variance Inflation Factor Test for Multicollinearity

Variable VIF 1/VIF

Board Size 2.47 0.405502
Nationality-Foreign 2.06 0.486460
Financial Expertise 2.04 0.491196
Board Independence 1.87 0.535485
Firm Attributes 1.62 0.618065
Board Age 1.45 0.688041
Education 1.36 0.734169
Gender Female 1.17 0.857350
Mean VIF 1.75
Source: (Researcher, 2016)

The results indicated by table 4.14 show that all the variables had avariance inflation

factor less than 10 (vif< 10) and a Tolerance Statistics greater than 0.10 (1/vif> 0.10)

which indicates that there was no trouble with multicollinearity.

4.6.3 Testing for Normality

The Shapiro-Wilk test was carried out to check for normality so as to ensure that the

residuals in the OLS regression models behaved normal. The residuals were

indicated by the letters “tm” for Tobin’s Q model, “em” for ROE model and “am”

for ROA model. The results for the test are shown by the table 4.15.

Table 4.15: Shapiro - Wilk Test for Normality

Models Residuals Obs. W V Z Prob>Z

Tobin’s Q Tm 65 0.97194 1.627 1.054 0.14602
ROE em 65 0.98928 0.622 -1.030 0.84847
ROA am 65 0.98130 1.084 0.175 0.43073
Source: (Researcher, 2016)
 62

The results indicated by table 4.15 showthe p-values of 014602, 0.84847 and

0.43073 for Tobin’s Q, ROE and ROA OLS regression models respectively. The p-

values are greater than 0.05 implying that the residuals were normally distributed.

Therefore, the study failed to reject the null that residuals are normally distributed

(at 95%significance level) and concluded that the residuals behaved normally.

4.6.4 Testing for Autocorrelation

The Durbin-Watson test was constructed to detect the presence of autocorrelation.

The null hypothesis in Durbin-Watson test is that there is no serial correlation. The

results for the test are presented by the table 4.16.

Table 4.16: Durbin-Watson Test for Autocorrelation

Tobin’s Q ROE ROA

Durbin-Watson Durbin-Watson Durbin-Watson
d-statistic (9, 65) d-statistic (9, 65) d-statistic (9, 65)
= 1.111254 = 0.9339058 =0.9254677
Source: (Researcher, 2016)

The results for the Durbin-Watson test indicated by table 4.16 show the d-statistics

of 1.111254, 0.9339058 and 0.9254677 for Tobin’s Q, ROE and ROA models

respectively. Since the d-statistics are greater than 0.05, the study failed to reject the

null that there is no serial correlation (at 95% significance level) and concluded that

the errors in different observations were not correlated with each other.

4.7Estimation of Moderation Effect Regression Models

The OLS regression models with Tobin’s Q, ROE and ROA as the dependent

variables were estimated so as to determine the strength of the relationship between

board characteristics and financial performance with the moderation effect of firm

attributes.The results for the estimated OLS regression model with Tobin’s Q, ROE

and ROA as the dependent variables are presented by the table 4.17.
 VARIABLES TOBIN’S Q ROE ROA

Coef. t P- Coef. t P- Coef. t P-

Value Value Value
Boardsize .2679042 4.25 0.000 2.792254 4.40 0.000 2.814626 4.93 0.000

Boardage .0790547 3.75 0.000 .753136 2.89 0.006 .6763675 2.69 0.009

Source: (Researcher, 2016)

Gender -.7085268 -6.28 0.000 -.6678184 -6.28 0.000 -.5740899 -5.29 0.000

Educationatleastdegree .0620731 7.22 0.000 .0163872 3.85 0.000 .0997094 3.42 0.001

Financialexpertise .0388663 5.02 0.000 .3379468 4.05 0.000 .4226381 5.46 0.000
63

Nationalityforeign .0718168 7.11 0.000 .5440244 5.15 0.000 .06314614 6.37 0.000

Boardindependence 1.161278 6.62 0.000 9.747147 4.58 0.000 9.153334 4.52 0.000

Firm Attributes .0002146 8.65 0.000 .0002146 8.65 0.000 0.0018732 6.54 0.000

Constant -8.67031 -4.19 0.000 -8.67031 -4.19 0.000 -83.21503 -4.36 0.000

Observations 65 65 65
Table 4.17: Estimation of OLS Regression Models withModeration

F-statistics F (8, 56) = 32.29 F (8, 56)= 18.52 F (8, 56) = 22.14

Model P-Value Prob>F = 0.0000 Prob>F = 0.0000 Prob>F = 0.0000

R-Squared 0.7964 0.6866 0.7598

 64

On moderation, the results indicated by table 4.17 show acompletely significant p-

value of (P>|z|=0.000) for the moderating variable firm attributes when integrated

with the variables for board characteristics regressed against Tobin’s Q, ROE and

ROA. Besides, according to the results, the p-values forall the variables on board

characteristic are less than 0.05, hence statistically significant.This is an

indicationthat firm attributes is statistically significant in explainingthe relationship

between board characteristics and financial performance.

4.8Testing Research Hypotheses

This study further tested the research hypothesesso as to test the relationship

between the study variables. The first objective of the study was to establish the

effect of board size on financial performance of manufacturing firms listed at the

Nairobi Securities Exchange in Kenya. The study hypothesized that board size has

no effect on financial performance of manufacturing firms listed at the Nairobi

Securities Exchange in Kenya. The results are indicated by table 4.18.

Table 4.18: Board Size and Financial Performance

Direct relationship between Coefficient t-statistic P - Value Sig. Level

Board size and Tobin’s Q 0.1121082 4.25 0.020 0.05

Board size and ROE 1.278358 4.40 0.003 0.05

Board size and ROA 1.535968 4.93 0.000 0.05

Source: (Researcher, 2016)

Based on the results it was noted that there is a positive significant relationship

between board size and financial performance of the listed manufacturing firms in

Kenya. The p-values were less than the specified 5 percent level of significance of

0.05 confidence level. Therefore, the null hypothesis was not accepted.
 65

The study findings arein tandem with Mahrous (2014) regarding the positive

associationbetween board size and firm performance.The study findings also agree

with a similar study by Wetukha (2013) which found a positiverelationship between

board size and performance in firms listed at the NSE in Kenya.Similarly, the study

findings concur with research by Shukoriet al., (2012) which found a significant

positive relationship between board size and ROE. Further, the study results concur

with Stakeholder Theory which suggests that performance can be enhanced through

large and well diversified corporate board sizes that accommodate and facilitate the

alignment of the interest of each constituent especially those that create value to the

firm (John &Senbet, 1998).

The second objective of the study was toexamine the effect of board diversity on

financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya. The study hypothesized that board diversity has no effect on

financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya.The results are indicated by table 4.19.

 VARIABLES TOBIN’S Q ROE ROA

BOARD DIVERSITY
Coeff. t- P- Coeff t- P- Coeff. t- P-
statistic Value statistic Value statistic Value

Boardage 0.0503148 2.58 0.012 0.4502603 2.52 0.015 0.4784947 2.40 0.020

Source: (Researcher, 2016)

Gender-femle -0.5735325 -5.70 0.000 -0.3501533 -4.63 0.000 -0.3485936 -4.16 0.000

Educationatleastdegree 0.0238523 3.86 0.000 0.015339 2.21 0.031 0.0621017 2.16 0.036
66

Financialexpertise 0.0294747 6.18 0.000 0.2560278 4.42 0.000 0.2681635 4.87 0.000

Nationality-Foreign 0.0664506 10.33 0.000 0.5211994 6.67 0.000 0.6209709 8.35 0.000
Table 4.19: Board Diversity and Financial Performance
 67

Based on the findings in table 4.19it was noted that when regressed with Tobin’s Q,

board diversity variables indicated a p-value of (P>|z|=0.000) for board age, gender,

education, financial expertise and nationality. The p-values were less than 0.05

hence statistically significant in explaining Tobin’s Q. Except for gender, all the

other board diversity variables have positive coefficients implying a directly

proportional relationship with Tobin’s Q. Gender diversity on the other hand is

inversely related to Tobin’s Q.

From the results shown by table 4.19, it was noted that the board diversity variables

ofboard age, gender, education, financial expertise and nationality were statistically

significant in explaining ROE. The variables havep-values of less than 0.05, hence

significant. Apart from gender, all the other board diversity variables have positive

coefficientswhich indicate a directly proportional relationship with ROE. However,

gender diversity has a negative coefficient implying an inverse relationship with

ROE.

The results indicated by table 4.19 show probabilities less than 0.05 for board

diversity variables of board age,gender, education, financial expertiseand nationality

while regressed with ROA. This implies that, the variables are statistically

significant in explaining ROA. All the diversity variables excluding gender, have

positive coefficients, hence, a directly proportional relationship with ROA.

Nevertheless, gender diversity has a negative coefficient implying an inverse

relationship with ROA.

 68

Based on the results, it was noted that board diversity variables of age, gender,

education, financial expertise and nationality were significantly related to the

measures of financial performance of the listed manufacturing firms in Kenya. Their

p-values were less than the specified 5 percent level of significance of 0.05

confidence level. Therefore, the null hypothesis was not accepted.

The study findings that board agehas a positive significant influence on financial

performance, is in agreement with a similar study by Mahadeoet al., (2011) which

combined age diversity variable with other variables of diversity, namely; age,

educational background and independence in a corporate context and found a

positive relationship between board age diversity and financial performance. Also,

the study by Victor et al., (2014) yields the same results. The study found that board

age had a positive significant influence on firm performance.

The study findings that the variables of financial performance are significantly

influenced by nationality, specifically the presence of foreign directors on the Board

are in tandem with Victor et al., (2014) who established that the proportion of

foreign directors on the Board is positively associated with company performance.

Similarly, the study findings are in agreement with Victor et al., (2014) whose study

established a positive significant relationship between proportion of foreign

directors’ and financial performance.

On the other hand, it is worth noting that gender diversity was found to have a

significant but negative relationship with the measures of financial performance.

Thesefindings agree with Salim (2011) whose study found a negative relationship

between gender diversity and financial performance measured by ROA and Tobin’s

Q.Similarly, the study results correspond with Wetukha (2013) whose study found a
 69

negative relationship between gender diversity and financial performance measured

by ROE. However, the study findings conflict with Horvath and Spirollari (2012) as

their study found gender diversity to have no significant effect on financial

performance.

The study results that financial expertise positively and significantly affects financial

performance are consistent with the study by Fernandes and Fitch (2009) which

found a significant positive relationship between financial expertise and financial

performance. However, the study results contradict the research by Minton et al.,

(2010) which found a significant negative relationship between financial expertise

and financial performance. This study results also disagree with Raymond et al.,

(2010) who found a significant negative relationship between financial expertise and

financial performance.

The study findings that board education positively and significantly influences

financial performance measured byTobin’s Q, ROE and ROA, are in agreement

withDarmadi (2011) who found that board members’ with educational qualifications

are significantly related to ROA and Tobin’s Q. The study results are also consistent

with Cheng et al., (2010) whose study found that university degrees held in the

Board are positively associated with ROA. However, the study results conflict with

Raymond et al., (2010) whose study found a negative relationship between

proportion of board members with education expertise and financial performance.

It is evident that the study findings strongly support the Resource Dependence

Theory. The findings concur with the Resource Dependence Theory as the theory

refers to the board of directors as a resource to the firm (Johnson et al., 1996;

Hillman etal., 2004) hence, are considered as part of the resource stream since they
 70

bring bundles of knowledge, experience, ideas and professional contacts (Carpenter,

Gelektkancyz& Sanders, 2000).

The Resource Dependence Theory therefore, advocatedfor diversity of boards since

they can lead to broader corporate networks and improve financial performance

(Waddock& Groves, 1997).Therefore, the presence of well diversified corporate

boards in terms ofage, gender, education, nationality and expertise plays an

important role in enhancing board effectiveness and financial performance. This is

mainly because diversified corporate boards are viewed as strategic resources that

provide a strategic linkage to different external resources which will in turn enhance

financial performance (Ingley& Vander Walt, 2001).

Similarly, the study findings agree with the Stakeholder Theory. The

theorypostulates the need to take into consideration the interests of other constituents

in corporate decision making (Freeman, 1984). For this reason, the theory advocated

fora well-diversified corporate board that accommodates and facilitates the

alignment of interests of each constituent so as to create value to the firm (John

&Senbet, 1998).

The third objective of the study was to ascertain the effect of board independence on

financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya. In this regard, the study hypothesized that board independence

has no effect on financial performance of manufacturing firms listed at the Nairobi

Securities Exchange in Kenya.The results are indicated by table 4.20.

Table 4.20:Board Independence and Financial Performance

 71

Direct relationship between Coefficient t-statistic P - Value Sig. Level

Board independence and 0.7621386 3.46 0.001 0.05

Tobin’s Q

Board independence and ROE 5.813143 2.15 0.036 0.05

Board independence and ROA 5.299949 2.27 0.027 0.05

Source: (Researcher, 2016)

Based on the results in table 4.20it was noted that the p-values for board

independence were less than the specified 0.05 confidence level. This implies that

board independence is statistically significant in explaining financial performance.

Since the coefficients for board independence variable were positive, this shows

evidence of a positive and directly proportional relationship between board

independence and financial performance. Therefore, the study rejected the null

hypothesis.

The study findings conflict the study by Minton et al., (2010) which does not find a

positive association between board independence and firm performance. However,

the study findings agree with Mahrous, (2014) which established a positive

relationship between board independence measured by the proportion of non-

executive directors and financial performance measured by ROA. Likewise, the

study findings concur with subsequent studies (Victor et al., 2014; Waithaka, et al.,

2014) which found a positive relationship between board independence and financial

performance.

The study findingscorrespondwith Agency Theory whichadvocated for a clear

separation between decision management and control (Fama& Jensen, 1983). The

study resultsalso concur with Agencytheorists’ point of viewthat boards with

 72

separated positions of the Chair and CEO are considered independent since such

arrangementsdilutethe power of the CEO thus increasing the board’s ability to

effectively perform its oversight role (Fama& Jensen, 1983).Further, the study

results correspond to the Agency Theory perspective that board independence is

fundamental to the best interests of shareholders, advocating that outside directors

can best represent the shareholder interests (Carter et al., 2003).

The fourth objective of the study was to determine the moderating effect of firm

attributes on the relationship between board characteristics and financial

performance ofmanufacturing firms listed at the Nairobi Securities Exchange in

Kenya. The study hypothesized thatfirm attributes have no moderating effect on the

relationship between board characteristics and financial performance of

manufacturing firms listed at the Nairobi Securities Exchange in Kenya. The results

are indicated by table 4.21.

Table 4.21: Board characteristics and Financial Performance with Moderation

Effectof Firm Attributes

 VARIABLES TOBIN’S ROE ROA Moderation Effect
Q (Indicated by change in coefficients)
Strength of Coefficients increase by:

Coeff. P Coeff. P Coeff. P Tobin’s ROE ROA

Value Value Value Q
Board Characteristics
Boardsize .2679042 0.000 2.792254 0.000 2.814626 0.000 .155796 1.513896 1.278658

Source: (Researcher, 2016)

Boardage .0790547 0.000 .753136 0.006 .6763675 0.009 .0287399 .3028757 .1978728

Gender -.7085268 0.000 -.6678184 0.000 -.5740899 0.000 .1349943 .3176651 .2254963
.0287399

Educationatleastdegree .0620731 0.000 .0163872 0.000 .0997094 0.001 .0382208 .0010482 .0534529
73

Financialexpertise .0388663 0.000 .3379468 0.000 .4226381 0.000 .0093916 .081919 .1544746

Nationality-foreign .0718168 0.000 .5440244 0.000 .6314614 0.000 .0053662 .022825 .0104905

Boardindependence 1.161278 0.000 9.747147 0.000 9.153334 0.000 .3991394 3.934004 3.853391

Composite Index -Composite index firm attributes is

integrated with board characteristics
Firm Attributes .0002146 0.000 .0002146 0.000 .0018732 0.000 variables to show moderation
effectindicated by change in
coefficients.
 74

On moderation, the results indicated by table 4.21 show acompletely significant p-

value of (P>|z|=0.000) for the moderating variable firm attributes when integrated

with the variables for board characteristics regressed against Tobin’s Q, ROE and

ROA. Besides, according to the results, the p-values forall the variables on board

characteristic are less than 0.05, hence statistically significant.This is an indication

that firm attributes is statistically significant in explainingthe relationship between

board characteristics and financial performance.

The study findings in table 4.21 indicate the change in the respective coefficients for

board characteristics variables on integration of the composite index firm attributes

as the moderating variable. On moderation, the coefficients for board characteristics

variables become stronger as compared to when there was no moderation effect. The

integration of the moderation effect of firm attributes causes an increase in the

strength of the respective coefficients for board characteristics

variables,henceresulting to more significant p-values.

In light of the study findings, the null hypothesis was not accepted.The study

findings are in tandem withKaruna (2009) who established that firm attributes

influence the firm’s choices of internal governance mechanism especially with

respect to financial performance measures. The study findings arealso supported by

the resource dependency theory which argues that as the firms’ size increases, more

resources are available to the firm (Waithaka, 2013). Therefore, the attributes of the

firm relating to age, size and asset structure influence the firms’ internal governance

mechanisms especially with respect to financial performance.

 75

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction

This chapter providesa summary of the findings of the study,conclusions drawn

from the findings, limitations of the study and the recommendations for practice

areas for further research.

5.2 Summary

This study was carried out due to the problem evident in the Kenyan manufacturing

sector related to the financial performance and corporate governance of the Kenyan

manufacturing firms. The results of the study were based on the research hypotheses

and objectives. The general objective of the study was to ascertain the effect of

board characteristics on financial performance of manufacturing firms listed at the

Nairobi Securities Exchange in Kenya.

The first objective of the study was to establish the effect of board size on financial

performance of manufacturing firms listed at the Nairobi Securities Exchange in

Kenya. From the objective, the study hypothesized that board size has no effect on

the financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya. The study found that there was apositive significant relationship

between board size and financial performance measured by Tobin’s Q, ROE and

ROA. Based on thestudy findings, it was therefore noted thatlarger Board sizes

significantly contribute to high financialperformance.

The second objective of the study was to examine the effect of board diversity on

financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya. The hypothesis drawn from the objective was that board
 76

diversity has noeffect on the financial performance of manufacturing firms listed at

the Nairobi Securities Exchange in Kenya.This study founda significant relationship

between board diversity and financial performance. The study found that diversity in

terms of age, education, expertise and nationalityof directors’ is significantly and

positively related to Tobin’s Q, ROE and ROA.However, the study found that board

diversity in relation to gender was significant thou it was inversely relatedto Tobin’s

Q, ROE and ROA.

The third objective of the study was to ascertain the effect of board independence on

financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya.Based on the objective, the study hypothesized that board

independence has no effect on financial performance of manufacturing firms listed

at the Nairobi Securities Exchange in Kenya. The study found that there was a

positive significant relationship between board independence and financial

performance measures of Tobin’s Q, ROE and ROA.According to the study

findings, board independence with regards to Boards’ having at least half non-

executive directors and separate positions of CEO and chairperson, significantly

contribute to high financial performance.

The fourth objective of the study was to determine the moderating effect of firm

attributes on the relationship between board characteristics and financial

performance ofmanufacturing firms listed at the Nairobi Securities Exchange in

Kenya.Drawn from the objective, was the hypothesis that firm attributes has no

moderating effect on the relationship between board characteristics and financial

performance ofmanufacturing firms listed at the Nairobi Securities Exchange in

Kenya.The study found that firm attributes have a significant moderating effect on
 77

the relationship between board characteristics and financial performance of the listed

manufacturing firms in Kenya.

5.3 Conclusion

The conclusions drawn by the study are based on the research objectives and

findings. Firstly, the study concludes that board size has a significant positive effect

onthe financial performanceof listed manufacturing firms in Kenya.Therefore, an

increase in the size of the Board, leads to an increase in financial performance of the

listed manufacturing firms in Kenya.

Secondly, the study concludes that diversity of the Board has a significant effect on

the financial performance of manufacturing firms listed at the Nairobi Securities

Exchange in Kenya. Consequently, awell-diversified Board in terms of age,

education, expertise and nationality leads to an increase in financial performance of

the listed manufacturing firms in Kenya.However, diversity in terms of gender leads

to a decrease in financial performance of the listed manufacturing firms in Kenya.

Thirdly, the study concludes that board independence has a significant positive

effect on the financial performance of manufacturing firms listed at the Nairobi

Securities Exchange in Kenya. Therefore, the presence of an independent Board

whereby the roles of CEO and chairperson are separate and at least half of directors’

on the Board are non-executive, leads to an increase in financial performance of the

listed manufacturing firms in Kenya.

Lastly,the study concludes that firm attributes has a significant positive moderating

effect on the relationship between board characteristics and financial performance of

listed manufacturing firms in Kenya.Implying that, firm attributes influence

 78

positively the association between board characteristics and financial performance of

the listed manufacturing firms in Kenya.

5.4 Contribution to Knowledge

This study contributes to knowledge in various ways. Firstly, the study established

how board size affects the financial performance of listed manufacturing firms in

Kenya. The study measured board size by the number of directors on the Board and

found a significant positive relationship between board size and financial

performance of the listed manufacturing firms in Kenya.

Secondly, the study found out how board diversity affects the financial

performanceof the listed manufacturing firms in Kenya. The study found that a

diversified Board in terms of age, education, expertise and nationality has a

significant positive relationship with the financial performance of the listed

manufacturing firms in Kenya.On the other hand, the study found that diversity in

terms of gender has a significant but negative effect on the financial performance of

the listed manufacturing firms in Kenya.

Thirdly, the study contributed to knowledge by finding out how board independence

affects the financial performance ofthe listed manufacturing firms in Kenya. The

study found that board independence indicated by the presence of at least half non-

executive directors on the Board and the separation of the positions of the CEO and

chairperson,influences positively the financial performance of the listed

manufacturing firms in Kenya.

Lastly, this study contributed to the knowledge on how firm attributes moderates the

relationship betweenboard characteristic and financial performance of the listed

manufacturing firms in Kenya. The study found that the attributes of the firm with
 79

regards tothe firms’ age, size and asset structure, influence positively the

relationship between board characteristics and financial performance of the listed

manufacturing firms in Kenya.

5.5 Recommendations for Practice

Based on the research findings, the study made several recommendations for

practice. Firstly, the study proposes that the listed manufacturing firms in Kenya

should stick to the recommendations regarding to board size. The study found a

significant positive relationship between board size and financial performance of the

listed manufacturing firms in Kenya.

Secondly, the study recommends that the listed manufacturing firms in Kenya

should improve their financial performance through having large well diversified

Boards’ with respect to age, education, expertise and nationality. The results of the

study foundboard diversity in relation to age, education, expertise and nationality of

directors’ to have a significant positive relationship with financial performance of

the listed manufacturing firms in Kenya.

Thirdly, the study suggests that the listed manufacturing firms in Kenya should

improve their financial performance through sticking to the recommendations

regarding to board independence. The resultsof the study found that board

independence indicated by the presence of at least a half non-executive directors’ on

the Board and separated positions of the CEO and the chairperson, has a significant

positive effect on the financial performance of the listed manufacturing firms in

Kenya.

Lastly, the study recommends that the listed manufacturing firms in Kenya should

improve their financial performance through taking into account the attributes of the
 80

firm relating to the firms’ age, size and asset structure while incorporating their

internal corporate governance mechanisms. The results of the study found that firm

attributes indicated by the firms’ age, size and asset structure, has a significant

positive moderation effect on the relationship between board characteristics and

financial performance of the listed manufacturing firms in Kenya.

5.6 Limitations and Recommendations for Further Research

Firstly, the study was limited to the manufacturing sector and so the study results

could not be generalized to all the other sectors in the market. Therefore, further

research should focus on other sectors of the market such as the financial sector and

the agricultural sector.

Secondly, the study was limited to solely the listed manufacturing firms in Kenya.

Hence, the study results could not be generalized to the unlisted manufacturing

companies in Kenya. Therefore, future studies should look at the nature of the

relationship between board characteristics and financial performance in the unlisted

manufacturing firms in Kenya.

Lastly, the content scope of the study was limited in terms of the proxy indicators

for board characteristics and financial performance. Therefore, further research

should extend board characteristics to include indicators such as board tenure and

board share ownership in their study. On the other hand, future research should

consider the use of other proxies of financial performance such as operating cash

flows and profit margin in their study.

 81

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APPENDIX 1:SECONDARY DATA COLLECTION TEMPLATE

DATA COLLECTION FORM

Data Collection Form No.

Company Name

Financial Year Ended

A. Data from Financial Statement obtained from NSE Handbook 2009-2013

and Companies’ Websites

1. Profit After Tax

2. Current Assets

3. Non-Current Assets

4. Total Assets

5. Shareholder’s Equity

6. Net Current Assets

7. Asset Structure = Non-Current Assets/Total Assets

8. Return on Equity ( Profit After Tax / Shareholders Equity)

9. Return on Assets (Profit After Tax / Total Assets)

10. Number of Issued Shares

11. Total Assets (Current Assets + Non- Current Assets)

12. Turnover/ Sales

B. Data from NSE Securities Market Reports

13. Share Price as at end of year

14. Market Capitalization ( Share Price X No. of Shares)

 92

15. Tobin's Q ( Market Capitalization / Total Assets)

C. Data from Annual Reports obtained from NSE /CMA Library/Kenyan

InvestorWebsite

16. Number of Directors

17. (a) Total Age of Directors

(b) Number of Women Directors

(c) Number of Directors with at least a Degree

(d) Number of Directors with Expertise in Finance

(e) Number of foreign directors

18. (a) Average age of directors

(b) Number of women directors/Total Number ofdirectors

(c) Number of Directors with at least a Degree/Total Number of Directors

(d)Number of Directors with Financial Expertise/Total Number of Directors

(e) Number of foreign Directors/Total Number of Directors

19. (a) Number of Non-Executive Directors

(b) Number of Non-Executive Directors/Total Number of Directors

20. There is Separation of positions of Chairperson and CEO = 1

Otherwise = 0

D. Data from NSE Handbook 2009-2013 and Kenyan Investor Website

21. The year of listing of the firm

22. The age of the firm since the year of listing up to the year of observation
 93

APPENDIX 2:SECONDARY DATA COLLECTION SHEET

NAME OF MANUFACTURING FIRM:

(a)FINANCIAL PERFORMANCE
Year Year Year Year2012 Year
2009 2010 2011 2013
i. ACCOUNTING - BASED MEASURES
Profit After Tax
Shareholder’s Equity
Return on Equity

Profit After Tax

Total Assets
Return on Asset

ii. MARKET - BASED MEASURE

No. of shares issued *
Share Price
Market Capitalization
Total Assets
Tobin’s Q

(b)FIRM ATTRIBUTES
Firm Age
Observation Year
Listing Year
Number of Years

Firm Size
Sales
Total Assets

Asset Structure
Non-Current Assets
Total Assets

(c)BOARD CHARACTERISTICS
Board Size:
Total number of board members
Board Diversity:
Proportion of female board members
Average age of board members
Board members with at least a degree
Proportion of foreign board members
Proportion of directors with expertise
in finance
Board Independence
At least 1/2 of directors are non-
executive and the positions of CEO
and chairperson are separated = 1
Otherwise = 0