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Empirical studies have shown that agency problem continue to exist where there is lack
of alignment of managers’ interests with those of the shareholders in terms of resource
management and returns on investment with regard to firm diversification. Previous
studies on board diversity and firm diversification have concentrated on large sized
firms in America, Western Europe and Asia with no conclusive evidence on the
relationship between board demographics and firm diversification while majorly
utilized static panel multivariate regressions. Due to differences in country specific
factors and level of market development, this study was an attempt to fill this gap by
utilizing both static and dynamic multivariate panel regression analysis in Kenya, a
developing economy. Agency Theory, free cash flow hypothesis and Resource Based
View theory provided theoretical framework that guided the study. The specific
objectives of the study were: to determine the relationship between diversities of board
gender, tenure, board experience, board nationality, board size, interlock directorship
and directors’ remuneration and firm financial diversification. Longitudinal research
design was used in the study. Data was extracted from Published Final Accounts of firms
listed at Nairobi Securities Exchange under Commercial and Manufacturing sectors for
the period 2004 to 2014. 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. Feasible Generalised Least Squares fixed and
random effect models and Arrelano-Bond dynamic panel regression models were used
to estimate the parameters used to test the hypotheses postulated by the study. Results
revealed that, board experience diversity, board nationality diversity, board size and
interlock directorship diversity determined firm diversification (p-value < 0.05). Agency
Theory, free cash flow hypothesis Resource Based view theory and upper echelon
theory provided complete explanation of the magnitude and persistence of firm
diversification. Directors’ remuneration negatively impacted geographic sales but did
not explain diversification in relation to national sales. Though gender diversity
significantly determined national sales it did not determine geographic sales. Experience
diversity positively and a significantly determined national assets, (p-value
0.0171<0.05) while Nationality diversity negatively and significantly determined
national assets, (p-value 0.0261<0.05) on the basis of static panel analysis. Dynamic
panel analysis revealed that tenure diversity negatively and significantly determined
geographic sales and investments in segments assets nationally. This study is a
behavioural compliment contribution to the more convectional financial dimensions of
firm performance particularly ROE, ROI and EPS. Further research may be conducted
to examine the relationships between board demographics, macro-economic factors
(inflation, foreign exchange rates and borrowing rates) and firm level of diversification.
The Government of Kenya and Capital Market Authority of Kenya should enact and
implement legislations that regulate gender and tenure diversity of boards as well as
enforce the constitutional 30% rule on gender. Similarly, companies should bring on
board more members with international experience and interlock directorship
orientations. |
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