Effect of Market Discipline on Financial Performance of Commercial Banks in Kenya

Ruth Mathina^1, , Ambrose Jagongo¹ and Lucy Wamugo¹

¹Accounting & Finance, Kenyatta University, Nairobi, Kenya

Cite this paper:
Ruth Mathina, Ambrose Jagongo and Lucy Wamugo. Effect of Market Discipline on Financial Performance of Commercial Banks in Kenya. Journal of Finance and Economics. 2022; 10(1):1-6. doi: 10.12691/jfe-10-1-1

Abstract

Commercial banks practicing improved information disclosure in their annual reports have recorded better performance. However, despite the mitigating efforts by the central bank of Kenya, commercial banks have recorded a decline in performance as shown by reduction in average return on assets over the period of study, that is; 4.7% in 2013, 3.4% in 2014, 2.9% in 2015, 3.3% in 2016, 2.7% in 2017, 2.7% in 2018, 2.6% in 2019 and 1.7% in 2020. The study sought to establish the effect of market discipline on performance of commercial banks in Kenya. Causal research design was employed. The target population included 38 commercial banks operating in Kenya between 2013-2020. Secondary panel data was collected from the banking supervision and individual bank’s published annual reports. Data analysis involved descriptive statistical analysis so as to determine the trend of the study variables while linear regression was used to test the relationship between market discipline and financial performance. The decision whether to fit a random or fixed effects model was determined after running Hausman specification test. Findings of the study were presented using tables while hypotheses were tested at 0.05 significance level. The study found out that market discipline insignificantly influenced financial performance of commercial banks in Kenya. The study recommends, that the managers of commercial banks should ensure that they strictly adhere to the regulations on information disclosure set by the central bank of Kenya in order to enhance their financial performance in the long run although the influence was not significant.

Keywords:
market discipline performance commercial banks

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Hawashe, A. (2015). Commercial Banks’ Attributes and Annual Voluntary Disclosure. A Case of Libya. International Journal of Accounting & Financial Reporting, Vol. 5 (2), ISSN 2162-3082.
[2]	Awadha, M., & Alareeni, B. (2018). Measuring Level of Voluntary Disclosures of Banks Listed in Bahrain Bourse. Journal of Accounting and Marketing, Vol. 7 (3), 1-12.
[3]	Aanu, O. S., Oluku, M. D., & Clementina, K. (2015). Does Financial Reporting Disclosures Enhance Firm Financial Performance in the Nigerian manufacturing companies? Mediterranean.
[4]	Quayes, S., & Hassan, T. (2013). Financial Disclosure and Performance of Microfinance Institutions. Journal of Accounting and Organizational Change, Vol. 10 (3), 314-337.
[5]	Zer, I. (2015). “Information Disclosures, Default Risk and Bank Value”. Finance & Economics Discussion Series 2015-104. Board of Governors of Federal Reserve System (U.S).
[6]	Mutiva, J. M., Ahmed, A. H., & Wambui, J. N., (2015). The Relationship Between Voluntary Disclosure and Financial Performance of Companies Quoted at the Nairobi Securities Exchange. International Journal of Managerial Studies and Research, Vol. 3 (6), 171-195.
[7]	Sharif, S., Ming, M. (2015). The Effects of Corporate Disclosure Practices on Firm Performance, Risk and Dividend Policy. International Journal of Disclosure Governance, Vol. 12, 311-326.
[8]	David, K., & Muendo, D. (2018). Effect of Central Bank of Kenya Regulations on the Financial Performance of Microfinance Institutions. The Strategic Journal of Business & Change Management, Vol. 6 (1), 584-623.
[9]	Mitnick, B. (1973). Fiduciary Rationality and Public Policy: The Theory of Agency and Some Consequences. Proceedings of the 1973 Annual Meeting of the American Political Science Association, New Orleans, LA, 69.
[10]	Mitnick, B. (1975). The Theory of Agency: The Policing “Paradox” and Regulatory Behavior. Public Choice, 24, Winter, 27-42.
[11]	Ross, A. (1975). The Economic Theory of Agency: The Principal’s Problem. American Economic Review, Vol. 62, 134-139.
[12]	Jensen, M., & Meckling, W. (1976). The Theory of the Firm: Managerial Behavior, Agency cost and Ownership Structure. Journal of Financial Economics, Vol. 3, 305-360.
[13]	Pepper, A., & Gore, J. (2012). Behavioral Agency Theory New Foundations for theorizing about Executive Compensation. Journal of management, Vol. 41 (4), 1045-1068.
[14]	Daily, M., Dalton, R., & Rajagopalan, N. (2003). Governance through ownership: Centuries of Practice, Decades of Research. Academy of management Journal, Vol. 46 (2), 151-158.
[15]	Nier, W., & Baumann, U. (2006). Market Discipline, Disclosure and Moral Hazard in Banking. EFA 2003 Annual Conference Paper No. 664.
[16]	Klerk, M., Villiers, C., & Staden, C. (2015). ‘The Influence of Corporate Social Responsibility. Disclosure on Share Prices: Evidence from the United Kingdom’, Pacific Accounting, Vol. 27 (2), 208-228.
[17]	Zikmund, G., Babin, J., Carr, C., & Griffin, M. (2013). Business Research Methods. 8th edition. South- Western, Cengage Learning, Amazon.
[18]	Greene, W.H. (2011). Econometric Analysis, 7th edition. Upper Saddle River, Prentice Hall.
[19]	Baltagi, H. (2013). Econometric Analysis of Panel Data, 5th edition. Chichester: John Wiley and Sons.