Factors Influencing Voluntary Corporate Disclosure by Kenyan Companies

• Author: Phil Hancock,Dulacha G. Barako,H. Y. Izan
• Date: 01 March 2006
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00491.x
• Published date: 01 March 2006

FACTORS INFLUENCING VOLUNTARY CORPORATE DISCLOSURE BY KENYAN COMPANIES

107

© 2006 The Authors

Journal compilation © 2006 Blackwell Publishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

Volume 14 Number 2 March 2006

Blackwell Publishing IncMalden, USA

CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2006

March 2006142107125ORIGINAL ARTICLES

FACTORS INFLUENCING VOLUNTARY CORPORATE

DISCLOSURE BY KENYAN COMPANIESDULACHA G.

BARAKO, PHIL HANCOCK AND H. Y. IZAN

*Address for correspondence:

Graduate School of Manage-

ment, The University of

Western Australia, 35 Stirling

Highway, Crawley 6009.

E-mail:

phancock@biz.uwa.edu.au

Factors Inf‌luencing Voluntary

Corporate Disclosure by

Kenyan Companies

Dulacha G. Barako, Phil Hancock* and H. Y. Izan

There has been considerable research in respect of voluntary disclosure by companies and

factors that may explain such disclosure. However, most of the research has been centred in

developed countries. This study extends the previous literature by examining voluntary

disclosure in a developing country, namely Kenya. Over the last decade, the Kenyan

Government has initiated several far-reaching reforms at the Nairobi Stock Exchange (NSE)

in order to mobilise domestic savings and attract foreign capital investment. These measures

include privatisation of state corporations through the stock exchange and allowing foreign

investors to own shares in the listed companies. This study provides a longitudinal

examination of voluntary disclosure practices in the annual reports of listed companies in

Kenya from 1992 to 2001. The study investigates the extent to which corporate governance

attributes, ownership structure and company characteristics inf‌luence voluntary disclosure

practices.

Our results suggest that the extent of voluntary disclosure is inf‌luenced by a f‌irm’s corporate

governance attributes, ownership structure and company characteristics. The presence of an

audit committee is a signif‌icant factor associated with the level of voluntary disclosure, and

the proportion of non-executive directors on the board is found to be signif‌icantly negatively

associated with the extent of voluntary disclosure. The study also f‌inds that the levels of

institutional and foreign ownership have a signif‌icantly positive impact on voluntary

disclosure. Large companies and companies with high debt voluntarily disclose more

information. In contrast, board leadership structure, liquidity, prof‌itability and type of

external audit f‌irm do not have a signif‌icant inf‌luence on the level of voluntary disclosure by

companies in Kenya.

Keywords: voluntary disclosure, corporate governance

Introduction

iven the crucial role that an exchange

plays in economic development,

1

es-

pecially in a developing economy, it is not

surprising that the Kenyan Government has

focused on transforming the Nairobi Stock

Exchange (NSE) as a vehicle for mobilising

domestic savings and attracting foreign capital

inf‌lows. As the NSE becomes an increasingly

important avenue to companies for accessing

G

cheaper sources of f‌inance (Wagacha, 2001),

the level of information disclosed by listed

companies is of interest to the growing audi-

ence of prospective local and foreign investors.

Crucial to investors’ participation at the stock

exchange is access and availability of informa-

tion about listed securities. The more accurate

and reliable information that companies dis-

close, the better is the public perception of

companies’ traded securities. This is particu-

larly relevant to Kenya, where there are con-

108

CORPORATE GOVERNANCE

© 2006 The Authors

Journal compilation © Blackwell Publishing Ltd. 2006

Volume 14 Number 2 March 2006

cerns about the quality of corporate f‌inancial

reports (World Bank, 2001).

Published annual reports are used as a

medium for communicating both quantita-

tive and qualitative corporate information to

shareholders, potential shareholders (inves-

tors) and other users. Although publication

of an annual report is a statutory require-

ment, companies normally voluntarily dis-

close information in excess of the mandatory

requirements. Company management recog-

nises that there are economic benef‌its to be

gained from a well-managed disclosure policy

(Williams, 2001). Thus, information disclosure

in itself is a strategic tool, which enhances a

company’s ability to raise capital at the lowest

possible cost (Healy and Palepu, 1993; Lev,

1992). In an attitudinal survey to explore why

companies list on the Nairobi Stock Exchange

(NSE), Wagacha noted that: “The predominant

reason for listing was identif‌ied as access to

cheaper resources of f‌inancing . . . f‌irms that

list look to the access of non-bank f‌inances as

a principal motivation for listing” (2001, p. 3).

Motivation

There is currently no empirical evidence avail-

able on the extent to which listed companies

in Kenya provide information over and above

that which is mandated, and whether there are

variations in the levels of such disclosure.

Therefore, the motivation for this study is to

examine the extent of voluntary disclosure in

annual reports and whether the variables that

researchers have found to be signif‌icant in

explaining voluntary disclosure practices by

companies in developed countries apply in a

developing country like Kenya.

The issue of corporate governance has

become an important issue in many countries

and the response has varied from a legislative

response like the Sarbannes-Oxley Act in the

USA to an adoption of best practice principles

in countries like the UK and Australia. The

results of this research may be useful for regu-

lators in Kenya as they deliberate the appro-

priate corporate governance requirements for

that country. This study also adds to the litera-

ture on voluntary disclosure in developing

countries and extends that literature by

including corporate governance variables as

possible explanatory variables for voluntary

disclosure.

2

In addition to corporate gover-

nance variables the paper also examines com-

pany attributes and ownership structure as

possible explanatory variables of the volun-

tary disclosure decision.

Additionally, after reviewing the corporate

governance literature in the African context,

Okeahalam and Akinboade concluded that:

“there has been limited published research

on corporate governance in Africa and even

less rigorous academic or empirical research.

There is an urgent need to embark on a

meaningful analysis of corporate governance

[research] in Africa” (2003, p. 28).

Finally, the World Bank Report in 2001 on

the observance of standards and codes in

Kenya, although specif‌ically examining

Kenyan companies’ compliance with Inter-

national Accounting Standards (now Inter-

national Financial Reporting Standards), the

World Bank noted: “weaknesses in corporate

governance practices, lack of pressure from

the users of f‌inancial statements for high-

quality information . . . pervades the corporate

f‌inancial reporting regime in Kenya” (2001,

p. 1).

It is against this background that we explore

voluntary corporate disclosure practices of

listed companies in Kenya. This is the f‌irst

known study to utilise data on Kenyan com-

panies. To summarise, this study examines

two related research questions: Firstly, to what

extent do Kenyan companies disclose infor-

mation in the annual reports over and above

that which they are required to disclose.

Secondly, to what extent do corporate gover-

nance attributes, ownership structure and

company characteristics inf‌luence the disclo-

sure decision. The study covers a ten-year

period from 1992 to 2001, to enable us to ex-

amine the trend in disclosure practices over

this period.

Corporate reporting and governance

in Kenya

Corporate f‌inancial reporting and

regulation in Kenya

As the focus in this research is on voluntary

disclosure, it is appropriate to provide a brief

overview of the regulatory framework in

Kenya with respect to corporate f‌inancial

reporting. This will give the reader some ap-

preciation of the corporate reporting environ-

ment and place the extent of voluntary

disclosure of information into some context.

Like most Commonwealth countries, the

Kenyan Companies Act

3

(Chapter 486, Laws

of Kenya), is based on and is substantially the

same as the UK Companies Act of 1948 (Ogola,

2000). The Kenyan Companies Act sets the

general framework for f‌inancial accounting

and reporting by all registered companies in

Kenya, and stipulates the basic minimum

requirements with regard to f‌inancial report-

ing. The Sixth Schedule of the Act sets out the