Board Effectiveness and Stock Liquidity Empirical Evidence at the Nairobi Securities Exchange

Agnes Njeru ,Florence Memba ,David Magaki Bichanga

doi:10.7176/rjfa/12-10-12

Abstract

The aim of this paper was to assess the influence of the board effectiveness on the stock liquidity of firms listed at the Nairobi Securities Exchange. The success of security markets highly depends on stock liquidity. The ease of buying and selling of securities in the stock market while not bringing any effect on the prices. Board effectiveness has been found to play a key role as an aspect of corporate governance on firms’ financial performance but its role still remains unclear on stock liquidity of firms listed at the NSE. It is on this merit that this paper sought to fill the existing gap by establishing whether the board effectiveness influences stock liquidity of firms listed at the NSE. A census was carried out on all the 68 firms listed at the Nairobi securities exchange for the period spinning from 2014 to 2018. This study used secondary obtained from the NSE and the listed firms’ published annual financial reports. Data analysis was done using descriptive and inferential statistics. Under descriptive statistics; mean, median, minimum, maximum, and standard deviation were used and for the inferential statistics correlation and regression analysis within panel data framework were used. Data was subjected to diagnostic tests with Eviews 7 as the main statistical tool of analysis. The findings of the study indicated that board effectiveness had positive and significant influence on stock liquidity of firms listed at the NSE when quoted spread was used as measure but no significant influence when measured by turnover, illiquidity and liquidity ratio. This study recommended that more monitoring needs to be done to enable firms to reduce transaction cost. Key Words: Board Effectiveness, Stock Liquidity, Nairobi Securities Exchange. DOI: 10.7176/RJFA/12-10-12 Publication date: May 31 st 2021

Highlights

1.1 Background of the StudyEffective corporate governance helps to build vibrant and efficient capital markets
Liquidity ratio (LR) as a measure of stock liquidity, the findings revealed that firms listed at the NSE reported an average liquidity ratio of 0.2587 with a maximum of 1.928 and a minimum of zero that deviated by 0.2644 on both sides of the mean
The study concluded that board effectiveness had positive and significant influence on stock liquidity of firms listed at the NSE when quoted spread was used as measure but no significant influence when measured by turnover, illiquidity and liquidity ratio

Summary

Introduction

Effective corporate governance helps to build vibrant and efficient capital markets. Investor’s confidence will be enhanced in market where firms have high standards of corporate governance. Corporate governance encompasses processes for board effectiveness and enhanced transparent disclosure of information. Both these requirements led to improved quality and quantity of information made available to investors. The board is considered as the main driver of organizational effectiveness and its ability to achieve the expected goals. The factors that determine the influence of the board effectiveness on stock liquidity are usually factors related to the board control and the quality of the process of decision making. Board effectiveness is only if operative goals were clearly articulated, boards effectiveness have never been empirically demonstrated because it relies on more than one factor (Solomon, 2013)

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Conclusion