Effect of institutional ownership structure on earnings management of the non-financial companies listed in Nairobi securities exchange, Kenya

Abstract

Earnings management has emerged as an imperative issue in the Nairobi securities exchange. The recent fall of Chase bank which was placed under receivership in 2016, Nakumatt in 2019, Dubai bank in 2015, Imperial bank in 2015 and Uchumi in 2006 with the retailors not paying up to 75% of the trade credit while the fallen banks could not pay up to 85% of the depositors’ savings. One of the ways of reducing earnings management in financial reports is to increase the voting rights of institutional owners who are known to be more vigilant than the ordinary shareholder. They have the capacity and the expertise to supervise the actions of managers. Despite the relative importance of these investors, little was known on their role in the Kenyan context. Most of the studies which was done in Kenya had concentrated on the impact of organizational governance structure on income normalization rather than looking at effect of institutional ownership structure on aggressive accounting practices. Moreover, studies on the effects of institutional structure on creative accounting had found inconsistent and conflicting results. Some have found a positive relationship while others have found a negative relationship yet other have found no relationship. Furthermore, they have not investigated the effect of Bank, Insurance, pension fund and government ownership on earnings management. Therefore, the purpose of the study was to determine the impact of institutional ownership structure on earnings management of listed non-financial companies at the Nairobi Securities Exchange. Specifically, the study sought to: determine the effect of bank ownership on earnings management of the non-financial companies listed in the NSE, Kenya, determine the effect of insurance ownership on earnings management of the non-financial companies listed in the NSE, Kenya. Assess the effect of pension fund ownership on earnings management of the non-financial companies listed in the NSE, Kenya, and determine the effect of government ownership on the earnings management of non-financial companies listed in the NSE, Kenya. This study was anchored on the agency theory, the bonus maximization theory, active monitoring theory and the passive hand theory. A census study was done comprising of the entire population of 38 listed non-financial companies for a period of five years 2014-2018. The study analyzed the data using the SPSS software, the analysis included the descriptive statistics, correlation and the regression analysis. The study found a statistically significant negative relationship between bank ownership and earnings management(coefficient = -0.276, p<0.05). Insurance ownership and earnings management was found to have a positive relationship (coefficient = 0.345,p<0.05). Pension fund ownership was found to have a negative but non-statistical relationship with earnings management (coefficient = -0.141,p>0.05), while government ownership and earnings management was found to have a negative relationship but not statistically significant (coefficient = -0.019,p>0.05). Thus implying that bank ownership and insurance ownership have an effect on earnings management while pension fund ownership and government ownership have no effect on earnings management. The study recommends that the minority shareholders should consolidate their investments through a special purpose investment vehicle to enable them elect a representative who can champion their interest at the board level. Based on the foregoing, the researcher proposed that a study be conducted in order to determine the impact of institutional ownership on financial reporting transparency in East Africa.