RELATIONSHIP BETWEEN BOARD CHARACTERISTICS AND FIRM FINANCIAL DIVERSIFICATION (GEOGRAPHIC SALES) AMONG LISTED FIRMS ON NAIROBI SECURITIES EXCHANGE, KENYA: STATIC PANEL APPROACH
DOI:
https://doi.org/10.47672/ajf.314Keywords:
listed firms, geographic segments sales, Diversification, board characteristicsAbstract
Purpose: The purpose of the study was to determine the relationship between board characteristics and firm financial diversification (geographic sales) among listed firms on Nairobi securities exchange, Kenya: static panel approach.
Methodology: Fisher and Levin-Lin-Chu tests were used to test the presence of unit root in the series under study. Hadri residual-based Lagrange multiplier test was used to determine the feasible model.
Results: Results revealed existence of positive and significant relationship between interlock directorship and geographic diversification as positive and significant directors' remuneration had a negative and significant effect on firm's geographic sales, while operational risk negatively varied with geographic sales Agency Theory, free cash flow hypothesis Resource Based view theory provided theoretical framework. Directors' remuneration negatively impacted geographic sales but did not explain diversification in relation to national sales. This study affirmed the managerial heuristics as determinant of firm financial diversification providing support to the convectional financial dimensions of firm performance particularly ROE, ROI and EPS.
Unique contribution to theory, practice and policy: The Government of Kenya and Capital Market regulator should enact and implement legislations that guides on interlock directorship, directors remuneration diversity and tolerable operational risks as determinants of diversificationDownloads
References
Austin Ujunwa, Chinwe Okoyeuzu & Ifeoma Nwakoby (2012) Corporate Board Diversity and Firm Performance: Evidence from Nigeria; Review of international comparative
Baltagi B. H (2005). Econometric Analysis of Panel Data, 3rd Edition. West Sussex, England:
Bank for International Settlements (2001): Operational Risk, Consultative Document, Basel Committee on Banking Supervision.
Berger, P.G. & E. Ofek, (1995). "Diversification's effect on firm value," Journal of Financial Economics, 37, 39-65.
Berger, P.G. & E. Ofek, (1997), "Causes and effects of corporate refocusing programs," Working paper, New York University.
Brush, T. H., Bromiley, P. & Hendrickx, M. (2000). The free cash flow hypotheses for sales growth and firm performance, Strategic Management Journal, 21:455-72.
Business Daily, December 11th,2015
Campa, Jose Manuel, & Simi Kedia, (2002), Explaining the diversification discount, Journal of
Finance 57, 1731-1762.
Capar N., & Kotabe M,. (2003). The Relationship Between International Diversification and Performance in Service Firms. Journal International Business Studies 34(4, 345 - 355)
Carmen Barroso M. Mar Villegas, and Leticia Prez-Calero (2011). Board Influence on a Firm's Internationalization, An International Review, 19(4):351-367
Carter, D. A., Simkins, B. J., & Simpson, W. G. 2003. Corporate governance, board diversity, and ï¬rm value. Financial Review, 38: 33-53.
Carter, DA, D'Souza, F, Simkins, BJ, & Simpson, WG 2007, "˜The diversity of corporate board committees and firm financial performance', retrieved 16 March 2015 from http://ssrn.com/abstract=972763.
Chakagati R. & R Sambharya (1987). Strategic Orientation and Characteristics of Upper Management; Strategic Management Journal, 8, pp. 393- 401
Chatterjee S, Wernerfelt B. (1991). The link between resources and type of diversification: theory and evidence. Strategic Management Journal 12(1): 33-48.
Data D. K. & N. Rajagopalan (1998). "Industry Structure and CEO's Characteristics: An Empirical Study of Succession Events; Strategic Management Journal, 19, pp. 833-852.
Del Brio, Esther B. Elida, L. Maia-Ramires & Alberto De Miguel (2010). Ownership Structure and Diversification a scenario of Weak Shareholder protection, Applied Economics 43,4537-4547.
Denis, D.,D.,Denis, & A. Sarin, (1997), "Agency problems, equity ownership, and corporate diversification," Journal of Finance, 52, 135-160.
Fanto, JA, Solan, L.M & Darley, JM (2011). "˜Justifying board diversity', North Carolina Law Review, vol. 89, pp. 901-935
Fich,E. M. & Shivdasani, A. (2006) Are busy boards effective monitors? Journal of Finance, 61: 689-724.
Finkelesten S. & D.C Hambrick (1996). Strategic Leadership. Top Executives and Their Effects on Organization. St. Paul, MN West.
Gaur, A. S. & Gaur, S. S. (2006). Statistical Methods for Practice and Research: A Guide to Data Analysis Using SPSS, Response Books, Sage Publication, New Delhi.
Geletkanycz, M. A. & Hambrick, D. C. (1997) The external ties of top executives: Implications for strategic choice and performance, Administrative Science Quarterly, 42(4): 654-82.
Geringer J. M., Beamish, P. W. & Dacostar R. C., (1989) Diversification Strategy and Internationalization: Implications for MNEs Performance. Strategic Management Journal, 10(2), 109-119
Geringer J. M., Tallman, S. & Olsen D. M., (2000). Product and Geographic Diversification among Japanese Multinational Firms: Strategic Management Journal 21, 51 - 80
GoK (2013). Economic Survey (2013). Reviewing Kenya's economic performance, progress, challenges and reversals, Institute of Economic Affairs
Gomes L. & K. Ramaswamy (1999). An Empirical Examination of the Form of The Relationship Between Multinationality and Performance; Journal of International Business Studies, 30 Pp 173-17.
Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. Econometrics Journal 3: 148-161.
Hambrick D. C. & A. Mason (1984). Upper Echelons: The Organization As A Reflection of its Top Managers: Academy of Managerial Review, 9, pp. 193-206
Hassan, Z, Samian, A.L. & Silong, A.D. (2006). Readings on Ethnic Relations in Multicultural Society: Perspectives and Research on National Unity and Integration, Serdang: University Pulra Malaysia.
Hendry, K. & Kiel, G. (2004). The role of the board in ï¬rm strategy: Integrating agency and organizational control perspectives, International Conference on Corporate Governance and Board Leadership. Blackwell Publishing Ltd. U.S.A.
Hitt M. A., Bierman L., Uhlenbruck, K., & Shimizu K. (2006). The Importance of Resources in the Internationalization of Professional Service Firms: The good the bad and ugly, Academy of Management Journal 49 1137-1157
Ibrahim, H & Samad, F.A (2011). Agency costs, corporate governance mechanisms and performance of listed firms in Malaysia; S. Afr .J. Bus.Manage.2011, 42(3)
Jackling, B.J. & Johl, S. (2009). Board structure and firm performance: Evidence from India's top companies. Corporate governance: An International Review, 17: 492-509.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers, American Review, 76:323-29.
Jensen, M.C. & Meckling, W.H. (1986), "Agency costs of free cash flow, corporate finance and takeovers", American Economic Review, Vol. 76, pp. 323-39.Journal of Political Economy, 102, 1248-1280.
John Wiley and Sons Ltd.
Kayo, E.K., & Kimura, H. (2010). Hierarchical determinants of capital structure. The Journal of Banking and Finance.
Kenya Financial Sector Stability Report December (2013), Issue no. 5, Annual Review by the Financial Sector Regulators Forum, August 2014.
Kenya Financial Sector Stability Report December (2013). Issue no. 5, Annual Review by the Financial Sector Regulators Forum, August 2014,
Kenya National Bureau of Statistics; Economic survey 2009
Kenya National Bureau of Statistics; Statistical abstract 2012.
Kim, W. C., Hwang, P. & Burgers, W. P. (1989) Global diversification strategy and corporate profit performance, Strategic Management Journal, 10: 45-7.
Kotabe, M., Srinivasan, S., S., & Aulakh, P., S., (2002). Multinationality and Firm Performance: The Moderating Role of R&D and Marketing Capabilities Journal International Business Studies 33(1, 79 -97)
La Porta R. Lopez-de-Silandes F., Shleifer A., & Vishni R. (2000). Investor Protection and Corporate Governance. Journal of Financial Economics, 58(1-2), 3-27.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. & Vishny, (1998). Law and finance, Journal of Political Economy, 106, 1113-55.
Laeven, L. & Levine, R. (2007). Is there a diversification discount on financial conglomerates? Journal of Financial Economics, 58, 331-67.
Lamont, Owen, & Christopher Polk, (2001). The diversification discount: Cash flows versus returns. Journal of Finance 56, 1693-1721.
Lang L.H.P. & Stulz, R.M (1994). Tobin's q corporate diversification, and firm performance, Journal of political economy, 102: 1248-80.
Larry D. & Su (2010) Ownership structure, corporate diversification and capital structure Evidence from China's publicly listed firms, Emerald Group Publishing Limited Vol. 48 No. 2, pp. 314-339
Lawrence, B. S., (1997). The black box of organizational demography, Organization Science 8:1-22.
Lee, C., & J.Farh.(2004). Joint effects of group efficacy and gender diversity on group cohesion and performance. Applied Psychology: An International Review 53 (1): 136-154.
Letting, N, Aosa .E, & Machuki .V, (2012). Board Diversity and Performance of Companies Listed on Nairobi Stock Exchange; International Journal of Humanities and Social Science, Vol. 2 No.11.
Lewellen, W., (1971), "A pure financial rationale for the conglomerate merger," Journal Finance, 26, 521-537.
Maksimovic, Vojislav, and Gordon Phillips, (2002). Do conglomerate firms allocate resources inefficiently across industries? Journal of Finance 57, 721-767.
Management Vol.13 1ssue 4.
Marimuthu, M & Kolandaisamy, I (2009) "˜Ethnic and gender diversity in boards of directors and their relevance to financial performance of Malaysian companies', Journal of Sustainable Development, vol. 2, no. 3, pp. 139-148.
Marimuthu, M. & Kolandaisamy, I. (2009). Can Demographic Diversity in Top Management Team Contribute for Greater Financial Performance? An Empirical Discussion"–, Journal of International Social Research, Vol. 2, No.8, pp. 273-286.
Mathur, I., Singh, M. & Gleason, K. C. (2004). Multinational diversiï¬cation and corporate performance: Evidence from European ï¬rms, European Financial Management, 10: 439-64.
Matsusaka, J. G. (2001). Corporate diversiï¬cation, value maximization, and organizational Capabilities, Journal of Business, 74 (30):409-31.
Michael Jensen and Edward J. Zajac (2004) Corporate Elites and Corporate Strategy: How Demographic Preferences and Structural Position Shape the Scope of the Firm, Strategic Management Journal.
Miguel, A., Pindado, J. & De la Torre, C. (2004). Ownership structure and firm value: new evidence from Spain, Strategic Management Journal, 25 1199-207.
Museve, Elijah, Tenai Joel, & Nyangweso Philip (2016). Relationship between Board Characteristics and firm financial diversification (National sales and Assets) among listed firms on Nairobi Securities Exchange, Kenya; International Journal of Economics, Commerce, and Management, Vol IV, Issue II,
Nachum, L,. (2004). Geographic & Industrial Diversification of the Developing Country Firms. Journal of Management Studies 41(2) 273 - 294
Pearce, JA & Zahra, SA (1992), "˜Board composition from a strategic contingency perspective' Journal of Management Studies, vol. 29, 4 July, pp. 411-438.
Pfeffer J., (1983). Organizational Demography in L.L Cummings & B. M.Staw (Eds); Research in Organizational Behaviour 5, pp. 299-357.Jai Press, Greenwich CT.
Pierre, D.S., (2010). "˜Women board members on rise in industry', Women's Wear Daily, vol. 199, issue 106, 19 May.
Pitts, D., (2005). "˜Diversity, representation, & performance: Evidence about race and ethnicity in public organizations', Journal of Public Administration Research &Theory, vol. 15, issue 4, pp. 615-631.
Porter; M.T.(1980). Competitive Strategy Techniques for Analysing Industries and Competitors. The Free Press: New York.
Shital J and Mishra, R.K, (2012). Board Diversity and Corporate performance: The Indian Case; The IUP Journal of Corporate Governance Vol. XI No.3, 212.
Shleifer, Andrei, & Robert Vishny, (1989). Management Entrenchment: The Case of Manager-Specific Investments, Journal of Financial Economics25, 123-139.
Stephen B., Noushi Raman & Corine Post (2010). The Impact of Board Diversity and Gender Composition on Corporate Social Responsibility and Firm Reputation; Journal of Business Ethics, 97:207-221.
Subrahmanyam, V.N., Rangan, N. & Rosenstein, S. (1997). "˜The Role of Outside Directors in Bank Acquisitions', Financial Management, 26: 23-36.
Tallman S., & Li. J. (1996). Effects of International Diversoty and Product Diversity on the Performance of Multinational Firms, Academy of Management Journal 39(1) 179-196
Varadarajan, P. Rajan, & Vasudevan Ramanujam, "Diversification and Performance: A Reexamination Using a New Two dimensional Conceptualization of Diversity in Firms," Academy of Management Journal, June 1987, 30, 380-93.
Villalonga, B., (2004a). Diversification discount or premium? New evidence from the business information tracking series, Journal of Finance, 59, 475-502.
Villalonga, B., (2004b). Does diversification cause the diversification discount? Financial Management, 33, 5-27.
Wan, C.C., (1998). International Diversification, Industrial Diversification, and Firm Perfomance of Hong Kong MNCs, Asia Pacific journal of management , 15: 205-17
Wan, W., & Hoskisson, R., (2003). Home country environments corporate diversification strategies and firm performance, Academy of Management Journal, 46, 27-45.
Wiersema M.F, & Bird A. (1993) Organizational demography in Japanese firms'; Group heterogeneity, individual dissimilarity and top management turnover, Academy of Management Journal, 36:996-1025.
Wooldridge, J., (2012). Econometric Analysis of Cross Section and Panel Data (3 ed.). New York: South-Western College Pub.
Yoshikawa, T., & Phan, P.H., (2005). The Effects of Ownership and Structure on Board Composition and Strategic Diversification in Japanese Corporations, Corporate Governance: An International Review, 13:303-12.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2018 Elijah Museve, Philip Mulama Nyangweso, Joel Tenai
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
