Board structure, intellectual capital, financial reporting quality, and firm value among companies listed on securities exchanges in East Africa

Abstract

The primary objective of economic entities is to maximize shareholders' wealth. Therefore, the concept of firm value is of great concern among varied stakeholders. However, firms listed in East African Stock Exchanges (Nairobi Securities Exchange, Uganda Securities Exchange, Dar es Salaam Securities Exchange, and Rwanda Securities Exchange) continue to report low firm value and massive corporate governances lapses. Therefore, the objective of this research was to examine the link between board structure, intellectual capital, financial reporting quality, and firm value among companies listed on East African securities exchanges. Specifically, the study examined the effect of board structure (board size, board diversity, board independence, and board expertise) on firm value, the moderating effect of financial reporting quality, and the mediating effect of intellectual capital on the relationship between board structure and firm value. The research was grounded on agency and resource based view theories and the positivism paradigm. The study used an explanatory research approach. Data was for the period 2012 to 2020 and was extracted from published financial reports. After applying the inclusion and exclusion criteria the final sample comprised of 67 firms. The choice between the fixed effect and the random effect model was based on the Hausman test. The findings show that while board size (β= -0.371, ρ<0.05) and board diversity (β=-0.053, ρ<0.05) had a negative and significant effect on firm value, board independence (β=0.126, ρ<0.05) and board expertise (β=0.393, ρ<0.05) had a positive and significant effect. Additionally, financial reporting quality had a significant moderating effect on the relationship between board size (β= -0.01, ρ<.05), board diversity (β= 0.02, ρ<.05), board independence (β= -0.02, ρ<.05) and board expertise (β= 0.04, ρ<.05). Intellectual capital had a mediating effect on the relationship between board size (β= - 0.087, ρ<.05), board diversity (β= -0.028, ρ<.05), board independence (β= 0.037, ρ<.05), board expertise (β= 0.103 ρ<.05) and firm value. Financial reporting quality moderated the indirect effect of intellectual capital on board independence (β= 0.011, ρ<.05).and board expertise (β= -0.02, ρ<.05) and firm value. Thus, management of listed firms should consider smaller and more diversified boards to enhance firm value. Besides, there is a need for mandatory intellectual capital disclosure and improve financial reporting quality to strengthen the effect of board structure on firm value. Finally, future research should look at the antecedent effect of other variables such as director tenure on firm value.