THE EFFECT OF BOARD SIZE ON FINANCIAL DISTRESS IN LISTED COMMERCIAL AND SERVICES FIRMS IN KENYA
Murigi Peter Njogu - Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
Dr. John Mungai (PhD) - Department of Accounting and Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
Financial distress has been a great concern to managers, investors and practitioners since time immemorial. This is because it can easily lead to insolvency and business failure and in worst cases financial distress leads to liquidation of the firm. In Kenya, companies such as Nakumatt Holdings, Uchumi Supermarkets, Tuskys Supermarkets, Karuturi Ltd, Mumias Sugar Company and Eveready East Africa have faced numerous challenges leading to financial distress and ultimately collapsing. The problem has also affected listed companies where corporate governance principles such as separation of ownership is lacking. Listed firms have exhibited high leverage level that averaged 25.8% oscillating between 22.64 % and 76.2 % between 2011 and 2022. These high levels of debt level suggest high chances of financial distress. Although previous scholars have explored the influence of corporate board structure on financial distress, there seems to be emphasis on board independence and diversity, leaving out the critical aspect of board size. Further previous scholars generalised all listed firms ignoring the fact that they are heterogenous. The objective of this study was therefore to determine the effect of board size on financial distress of listed commercial and services companies in Kenya. To achieve the objectives the study was anchored on agency theory and adopted an explanatory research design targeting 9 listed commercial and services companies in Kenya. Secondary data collected via secondary data collection sheet was utilized. The analysis of quantitative data involved the application of descriptive and inferential statistics which encompass frequencies, means, and standard deviations, whereas inferential statistics encompass regression and correlation analysis. Panel regression model was utilized to test the relationship between board size and financial distress in listed commercial and services companies in Kenya. Findings revealed that board size has a significant negative effect on financial distress (β = -0.6145, p = 0.005), suggesting that larger boards reduce the likelihood of financial distress. It indicates the importance of diverse perspectives in mitigating financial distress. The study thus concluded that optimally structuring the size of the board can significantly reduce financial distress. It is recommended that firms strengthen their governance structures by expanding board size to expand expertise and skills scope in the board.