Earnings Quality and Firm Value Among Non-Financial Listed Firms in the Nairobi Securities Exchange

Abstract

Purpose: The purpose of this study was to determine the effect of earnings quality on firm value among non-financial firms listed on the Nairobi Securities Exchange (NSE). The study was anchored on Signaling Theory, which posits that high-quality financial information serves as a credible signal of firm performance to investors.

Methodology: The study adopted a positivist research philosophy and employed an explanatory longitudinal research design. The target population comprised 40 non-financial firms listed on the NSE, of which 33 met the inclusion criteria between 2015 and 2024. Using 330 firm-year observations derived from audited financial statements, panel data were analyzed using descriptive statistics and fixed-effects regression models in STATA to evaluate the relationship between earnings quality and firm value.

Findings: The results revealed that earnings quality had a positive and statistically significant effect on firm value (β = 1.363, p < 0.001). This finding indicates that firms reporting transparent, consistent, and sustainable earnings achieve higher market valuations, suggesting that earnings quality is a key determinant of investor confidence and firm valuation in the Kenyan capital market.

Conclusion: The study concludes that high-quality earnings provide credible signals about managerial competence and financial stability, thereby enhancing investor confidence and firm value. Consistent and transparent financial reporting practices strengthen firms’ reputation and market credibility, leading to improved performance and shareholder value.

Value: This study contributes to the empirical understanding of the relationship between financial reporting quality and firm valuation in emerging markets. It provides practical recommendations for managers to adopt consistent accounting policies, strengthen internal controls and audit oversight, and improve disclosure practices. Furthermore, regulators such as the Capital Markets Authority (CMA) and the Institute of Certified Public Accountants of Kenya (ICPAK) should reinforce compliance with international reporting standards to enhance financial transparency. Theoretically, the findings validate Signaling Theory by demonstrating that credible financial reporting acts as a market signal of reliability and long-term stability, influencing investor decision-making in developing capital markets such as Kenya.