The relationship between executive compensation and firm value for firms listed at the Nairobi securities exchange

Abstract

This study investigates the relationship between executive compensation and firm value for firms listed at the Nairobi Securities exchange. After controlling for firm characteristics such as size and leverage, I find that executive compensation is significantly positively related to firm value, where the Tobin’s Q was used as a proxy for firm value. These findings are consistent with the view that the principal-agent problem can be mitigated through linking pay and performance. In particular it will address the agency conflict between management and shareholders, management and debt holders through judicious use of corporate debt and mitigate the agency conflict between minority and majority shareholders. This therefore would reduce agency costs as proposed in agency theory