AN EMPIRICAL TEST OF SHAREHOLDER MONITORING HYPOTHESIS AT THE NAIROBI SECURITIES EXCHANGE

Abstract

Most corporate governance studies have focused on the composition and effectiveness of board members, little attention has barely focused on the interaction between the identity of significant shareholders and the decisions they influence in the firm. Corporate governance literature is currently based on empirical studies in developed countries, but the efficiency of developed and developing markets' corporate governance mechanisms is disparagingly different. This paper presents an ideal moment for examining the large shareholder monitoring hypothesis at Nairobi Securities Exchange which is a developing securities exchange market. Previous studies examining the interaction between corporate governance and firm value have emphasized the significance of institutional shareholder monitoring and dividend policy and capital structure decisions as corporate control mechanisms that influence value creation in a firm. This study is supported by dividend signaling, capital structure theory, and shareholder monitoring hypothesis. The data for the study is for the period (2008-2017) and the target population is sixty-six companies trading securities at NSE 2008-2017. The findings of this study suggest that dividend signaling is still a relevant theoretical explanation for dividend payment by companies with diverse shareholders and large shareholder monitoring has no strong theoretical significance on its own but empirical evidence presents a complementary explanation for the role of large shareholders at the Nairobi Securities Exchange. Nairobi Securities Exchange has a high level of ownership concentration and dividend payment has a significant positive effect on the firm value which is in line with the signaling hypothesis, the independent role of large shareholders was negated and therefore did not support the shareholder monitoring hypothesis. The findings of this study have significant policy implications to policymakers, regulators should not rely on the market mechanism as protection to minority owners. Firms should be encouraged to regularly pay dividends if profitable and investors should understand the ownership structure of listed firms they invest in.

Key Terms: Shareholder monitoring, Ownership concentration, Dividend signaling, Firm value