Free Cash Flows, Agency Costs, Firm Characteristics and Performance of Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Firm performance is affected by various factors, both internal and external to the firm. Internal factors include factors such as firm size, age, liquidity, leverage, free cash flows, agency costs, profitability and growth prospects, among others. External factors include regulation and general macro-economic factors. This research sought to find out the influence of agency costs and firm characteristics on the relationship between FCF and firm performance. The first study objective was to establish how FCF influence performance of NSE listed firms. The second objective was to find out how agency costs influence the relationship between FCF and performance of NSE listed firms. Thirdly, to determine how firm characteristics influence the relationship between FCF and performance of NSE listed firms, and lastly, to establish the joint effect of FCF, agency costs and firm characteristics on the performance of NSE listed firms. The study used secondary panel data which were obtained from 60 firms listed at the NSE. Secondary data was for the period 2006 to 2015. Multiple and simple regression analyses were employed. Results indicate that FCF have a positive, statistically significant effect on firm performance; and also, agency costs have a statistically significant positive intervening effect on the relationship between FCF and firm performance. Additionally, firm characteristics have a positive moderating effect on the correlation between FCF and financial performance. Finally; FCF, agency costs and firm characteristics have a positive statistically significant joint effect on firm performance. These findings are inconsistent with the agency theory and the FCF hypothesis. Conversely, the findings seem to support the stewardship theory. The study therefore recommends that firm managers, shareholders, practitioners, the government and other regulators should enhance firm monitoring because the benefits derived from investing therein seem to outweigh the costs. Further research needs to be conducted using longitudinal study design and also by integrating the views of other practitioners in data collection rather than focusing on firm managers only.