Effect of Accounting Conservatism on Firm Value of Non-Financial Firms Listed on the Nairobi Securities Exchange

Abstract

This paper examined the effect of accounting conservatism on firm value among non-financial firms listed on the Nairobi Securities Exchange. The study was anchored in Signaling Theory and adopted a positivist philosophy and an explanatory longitudinal design. The target population comprised 40 non-financial listed firms, of which 33 met the inclusion criteria for the period 2015-2024, yielding a balanced panel of 330 firm-year observations. Secondary data were obtained from audited annual reports, published financial statements, Capital Markets Authority records, and Nairobi Securities Exchange handbooks. Firm value was measured using approximate Tobin's Q, while conditional accounting conservatism was measured using the Basu asymmetric-timeliness model. Data were analyzed in STATA using descriptive statistics, correlation analysis, diagnostic tests, panel unit-root tests, the Hausman specification test, and fixed-effects regression. Accounting conservatism was positively correlated with firm value (r = .277, p < .01). The fixed-effects model was statistically significant, F(6, 281) = 51.68, p < .001, and accounting conservatism had a positive and statistically significant effect on firm value after accounting for the other financial-reporting dimensions and firm controls (β = 0.880, SE = 0.278, t = 3.160, p = .002; 95% CI [0.332, 1.428]). The null hypothesis was therefore rejected. The study concludes that prudent recognition of losses and delayed recognition of uncertain gains enhance the credibility of financial statements and support higher market valuation. Firms should institutionalize consistent conservative reporting, strengthen audit oversight, and apply impairment, provision, and contingent-liability policies in line with applicable financial-reporting standards. Regulators should reinforce consistent compliance and disclosures without encouraging deliberate understatement that could obscure a firm's underlying economic performance. Keywords: Accounting Conservatism, Firm Value, Non-Financial Firms, Nairobi Securities Exchange, Fixed Effects