Sustainability Disclosures And Financial Performance Of Listed Companies On The Nairobi Securities Exchange, The Mediating Role Of Firm Size

Abstract

This study examined the effect of sustainability disclosures on the financial performance of firms listed on the Nairobi Securities Exchange (NSE) and assessed the mediating role of firm size. The study was motivated by the volatility in the financial performance of listed firms, mixed empirical findings on the sustainability disclosure financial performance relationship, and limited evidence concerning the mediating role of firm size in emerging markets. The study was grounded in Agency Theory, Legitimacy Theory, and Triple Bottom Line Theory. A positivist philosophy as adopted, explanatory and longitudinal research designs were used. Secondary data were obtained from annual reports, sustainability reports, and integrated reports of 40 NSE-listed firms covering 2012–2023, resulting in a balanced panel of 480 firm-year observations. Social, governance, and environmental sustainability disclosures were measured using content-based disclosure indices, while financial performance was measured using Return on Assets (ROA). Firm size, measured as the natural logarithm of total assets, was the mediating variable, whereas firm age and leverage were controlled. Fixed-effects and random-effects panel regression models were selected using the Hausman specification test and estimated using cluster-robust standard errors. Mediation was assessed using the Baron and Kenny stepwise approach. The findings showed that social sustainability disclosure had a positive and statistically significant effect on ROA (β = .0015, p < .001; within R² = .5070). Governance sustainability disclosure also had a positive and significant effect on ROA (β = .0008, p < .001; within R² = .1566), while environmental sustainability disclosure positively and significantly affected ROA (β = .0014, p < .001; within R² = .5012). In the joint model, social (β = .00088, p < .001), governance (β = .00019, p < .001), and environmental disclosure (β = .00076, p < .001) remained positive and significant, with R² = .8116. Accordingly, H01, H02, and H03 were rejected. The Baron and Kenny stepwise analysis showed that social and environmental sustainability disclosures had positive, significant effects on financial performance (β = .0015 and β = .0014, respectively; both p < .001) and negative, significant associations with firm size (β = −.0074 and β = −.0086, respectively; both p < .001). Firm size was negatively associated with financial performance (β = −.0130, p = .014). After firm size was included, the social and environmental disclosure coefficients declined to .0014 and .0013, respectively, but remained significant, indicating partial mediation; H₀4a and H₀4c were rejected. Governance disclosure positively affected financial performance (β = .0008, p < .001), but did not significantly predict firm size (β = −.0019, p = .201); therefore, H₀4b was not rejected. In the joint model, all three disclosures remained positive and significant (social β = .00085; governance β = .00020; environmental β = .00071; all p < .001), while firm size remained negative and significant (β = −.0065, p < .001). The model was jointly significant (Wald χ² = 4099.60, p < .001), and H₀4 was rejected.