Nairobi Securities Exchange

Investors utilize earning schooling to calculate the train of woo of faithfulness smashing. The cost of equity for a firm is computed by adding up the risk free score and a premium for exposure to systematic risk as follows be of equity = Risk-free rate + (risk measure) x (mart risk premium)1.4 Nairobi Securities substitutionThe Nairobi Securities Exchange offers a vocation platform for both the local anesthetic and planetary investors who atomic number 18 looking to gain exposure to Kenya and Africas economic growth. NSE bout a critical role in the growth of Kenyas economy by encouraging savings and enthronisation by helping local and international companies access cost- exerciseive capital. NSE is regulated by the slap-up Markets Authority of Kenya.CMA approves humans listing and fosters investors self-assertion by ensuring rules, regulations and requirements for trade be complied with and marketplace whizness is sustained in order to guarantee orderly, fair a nd efficient markets (CMA, 2016). CMA retains investors confidence by ensuring rules, regulations and requirements for trade are complied with and market integrity is maintained.CMA also plays an heavy responsibility of mobilization and allocation of capital resources in the economy in order to nominate incentives for long term investments (NSE, 2016) In Kenya, listed firms are indispensable to produce quarterly, semi- m whiztary statements and audited annual reports. Financial statements are prepared according to multinational Financial Reporting Standards (IFRS) and audited using International Standards on Auditing (ISA).The CMA guidelines encourage firms to peril additional randomness on director and caution remuneration (CMA, 2016). The mental process of the NSE is an indication as to whether the investors have trust in the safety of their investment, affair goes down signifi reartly with low investors confidence.NSE is categorize into three different market segments n amely the Main Investment Markets (MIMS), the Alternative Investment Markets (AIMS) and the Fixed Income Securities Market Segment (FISMS).According to CMA (2017) as at December 2017, listed companies at the NSE were 64, categorized into 11 sectors namely Agricultural sectors, Automobiles and Accessories sector, Banking sector, Commercial and Services sector, Construction and assort sector, Energy and Petroleum sector, Insurance sector, Investment sectors, Manufacturing and Allied sector, Telecommunication and applied science sector and Growth and Enterprise Market Segment sector Banking sector is the largest sector represented with 18% of the total firms listed at the NSE, second is mercantile and Services sector and Manufacturing and Allied with 15% from each one, Agricultural sector which is one of the country major economic sector is represented by 11% of the total firms quoted.Telecommunication and Technology and Growth and Enterprises Market sectors were the lowest each w ith 2% of the total firms quoted. Through NSE, revealings have had an impact on how investors trade, when the level of revealing is high, investors confidence increases then higher level of trading. The CMA guidelines encourage firms to fail additional education on director and attention remuneration (CMA, 2016).The movement of the NSE is an indication as to whether the investors have trust in the safety of their investment, trading goes down significantly with low investors confidence.1.5 Statement of the Problem Inherent shortcomings of handed-down reporting have prompted conk outment of conscious revealing models. Transparency and revelation creates and sustains confidence of investors, stakeholders and the winder society and provides opportunity for continuous improvement of air structure and processes.Corporate governance is currently an area broadly creation researched on by many scholars, due to change magnitude application of corporeal governance practices al l over the world after major corporeal scandals due to lack or improper manifestation. This written report targets one tower of corporate governance on the cost of equity capital, which is instinctive disclosure. let out schooling provides a signal with an aim of revealing the state of a party to the investors for consideration in investment activities. Information has authoritative and brisk role, information should be chthonianstandable, complete, accurate, timely and reliable (Fahdiansyah, 2013).Information is considered informative if it is relevant and can change stakeholders belief and gives confidence to investors. Annual reports are important tools in communicating indwelling information about a guild both financial and non financial information (Barako, 2007). The key drivers of corporate think of in critical areas of the business are not reported under the traditional accounting model, as such theorist and researchers have begun to develop models for additional volunteer(prenominal) information disclosure.The concept of spontaneous disclosure has been suppuration minded(p) the needs to keep with the clients expectations. Investors and clients have challenged companies on the need to provide more than what is required by the law and regulations. In Kenya, investors obtain essential information regarding trading activities of listed companies in NSE through their annual reports and other bulletins from CMA.Studies through with(p) in Kenya linguistic context include a study Mwangi and Mwiti (2015) investigated the impact of wilful disclosure on stock performance, Mutiva (2015) examined the personnel of voluntary disclosures on financial performance of firms quoted at NSE, Lopokoiyit (2012) investigated the topic of the corporate governance practices on assign prices of companies listed at the NSE, these studies found a direct relationship surrounded by voluntary disclosure and company performance.Study by Asava (2013) investigated the effect of voluntary disclosure on stock returns of listed companies, her study reveals that there was no correlation amidst voluntary disclosure and stock returns. Barako (2007) in his study of determinants of voluntary disclosure in Kenyan listed companys annual reports, observed that companies cannot link their board disclosure, hostile ownership and firm size significantly affect financial performance.Studies by Diamond and Verrecchia (1991), Botoan (1997), Hail (2002), Botosan and Plumlee (2002), Richard and welker (2001) and Lopes and Alencar (2008), shows a negative association between voluntary disclosure and the cost of equity capital using direct approach. so far these studies were done in demonstrable economies with few studies done in the context of developing nations, these studies tested the association between voluntary disclosure and several(prenominal) aspects such as profitability (Verracchia and Webber, 2006) stock liquidity.However most of these literatur es are leaning more on factors that influence the extent of voluntary disclosure. Literatures from forward studies conducted locally have skewed more to factors that influence extent of voluntary disclosures with few on the effect of voluntary disclosure on the cost of equity capital on firms listed in NSE, the motivation of this research is developed by the fact that majority of past research have given conflicting arguments creating a dilemma that necessitates further research on the effect of voluntary disclosure on the cost of equity capital of firms in Kenya.1.6 Objective of the study The general objective of this study is to examine the effects of voluntary disclosure on the cost of equity of capital. The following are the specific objectives.i). To examine the effect of forward-looking information voluntary disclosure on the cost of equity capital.ii). To determine the effect of financial information voluntary disclosure on the cost of equity capital.iii). To evaluate the e ffect of corporate social responsibility information voluntary disclosure on the cost of equity capital. iv). To establish the effect of Board information voluntary disclosure on the cost of equity capital.1.7 Research question The study will be guided by the following research questions.i. What if the effect of forward-looking information disclosure on the cost of equity capital?ii. What is the effect of financial information disclosure on the cost of equity capital? iii. What is the effect of Corporate Social Responsibility information disclosure on the cost of equity capital? iv. What is the effect of Board surface information disclosure on the cost of equity capital?1.8 importee of the study Voluntary disclosures provide an extra way for investors to judge a companys performance. This study will therefore enable the investors to make better investment ends and better capital allocations. It will also emphasize on increased transparency which reduces information asymmetry that may exist between the investors and the circumspection team. This study will likewise extend the literature on voluntary disclosure to academicians.The study will also help listed and unlisted companies in Kenya in understanding the role of voluntary disclosure in the management of their firms with aim to reduce cost of its equity capital.CHAPTER TWO LITERATURE REVIEW2.1 IntroductionsThis chapter introduces theories that exempt the outlet of voluntary disclosure and past empirical studies relating to the variables under the study.2.2 a priori ReviewReporting and disclosure are the most important tools that companies use to communicate with wager-related parties. several(prenominal) theories have been documented to relate voluntary disclosure.They are Agency speculation, Capital Need theory, Signaling theory and Stakeholder theory. Literature review presents theories about the subject of voluntary disclosure.2.2.1 Agency TheoryAgency theory was developed by Jensen and Mecklin g in 1976 who delimitate commission relationship as a contract under which one or more persons delegate decision fashioning authority to some other person to perform some services on their behalf. Agency theory explores the relationship between a school principal and an agent.In the context of a company, the manager (agent) acts on behalf of the shareholder (Principal). Company owners empower managers to make decisions on their behalf. Shareholders do not actively participate in the management of their investments sooner they engage managers to act on their behalf. This makes managers have information advantage hence creating incentive to maximize their own revalue as opposed to that of the shareholders.Scott (2012) verbalize that the application of agency theory is used to explain the conflict of interest between managers and investors. The agency bother arises due to conflict of interest between the investors and management because their goals are not in agreement. Agency theory is pertain with solving two problems arising in the agency relationship an agency problem arises when there is a conflict between the goals of the principal and that of the agent making it difficult for the principal to accurately evaluate and determine the value of decision made by the agent.Secondly problem of risk sharing arising from respective(a) attitude of the principal and the agent towards risk, the problem is each tends to select a different action when the risk happens (Depoers, 2000). One way in which agency problem can be minimized is by means of contract, it helps in bringing shareholders interest in line with managers interests (Healy and Palepu, 2001).These contracts require management to give out relevant information to investors and to creditors.Consequently principal can check if the management complied with the contract agreements and evaluate if their decisions are in alliance with their interest, supervise managers by mean of contract comes with a c ost at the expense of managers compensation and in order to reduce any potential conflict, principals incur monitoring be while agents incur bonding costs which guarantees the interest of the principal is prioritized. Agency costs are the total of monitoring costs, bonding costs and residual loss. According to agency theory, disclosing information voluntary is viewed as a better mechanism of mitigating the agency problem between the agents and principals (Hawashe, 2014).Managers who posses private information about a firm are able to use their information they posses to make credible and reliable communication to interested parties to optimize the value of the firm (Barako, 2007), these disclosure may include investment opportunity and pay policy of a company, however managers who pursue their own interest may fail to make proper information disclosure.Managers increases the level of voluntary information which is expected to reduce the agency cost (Barako et al., 2006) and also to convince the outdoor(a) users that managers are acting in an optimal way (Watson et al., 2002). OCED (2004) states that a squiffy disclosure policy is one of the expected monitoring forms that is useful as a basis of adequate information for investment decision making by investors.2.2.2 Capital Need TheoryThe main aim any company is to attract external finance to increase their capital either through debt or equity, however companies are disclosing more information voluntary as a measures of minimizing costs of raising its capital. The capital need theory can help to explain the reasons behind the disclosure