Accounting Disclosures and Firm Value of Commercial Banks Listed on the Nairobi Security Exchange, Kenya

Abstract

The financial health, sustainability and soundness of banks is a basic requirement for the depositors and equally important for the shareholders, employees, and the entire economy. Thus, regulators across the globe have made an effort to measure the financial wellbeing of banks by requiring them to disclose information about their operations. External factors including being stripped of licenses, deregulation, lack of information amongst the customers, homogeneity of the business, connectivity amongst the banking sector affect the performance of the bank which is reflected in their value. The collapse of three commercial banks over a short period of time focused the attention of regulator and policymakers on the disclosures by commercial banks in Kenya. Investors have also demanded greater transparency particularly for firms listed at the Nairobi Securities Exchange. Further, a review of the trends in the share prices of listed commercial banks and the information released indicates contradictions. An analysis shows that in some instances the share prices recorded show increases despite the company releasing negative information and/or vice-versa. This leads to the question of what is the relationship between disclosures on the firm value. The aim of the study was to determine the effect of accounting disclosure on the firm value of listed commercial banks in Kenya. The study was guided by four research objectives namely: to determine the effect of accounting practices disclosures, risk information disclosures, hedging strategies disclosures, and reserves disclosures on the firm value of listed commercial banks in Kenya. The value of the firm was measured using the market based measurement Tobin's Q. The study was anchored on the Decision Usefulness Theory, Signalling Theory, and Positive Accounting Theory. The disclosure items were measured using an accounting disclosure index, which is a checklist of different disclosure indicators included in the annual reports of the listed commercial banks. The accounting disclosure consisted of 25 items. The study adopted a causal research design. The study sampled all the listed commercial banks. The study established that accounting policies, risks, hedging strategies, and reserves had a positive and statically significant effect on firm value of commercial banks listed on the Nairobi Securities Exchange.