Ownership Structure, Agency Costs, Board Independence and Corporate Risk Among Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

This research aimed to discover how ownership structure affects corporate risk of firms listed on the Nairobi Securities Exchange, with agency costs as mediating variable and board independence as moderating variable. The anchoring theory that drove the study was agency theory. The other theories that the study adopted were the mean variance- portfolio theory, stewardship theory and resource dependence theory. A positivist research paradigm underpinned the study. The research design was causal survey since the study aimed at establishing a cause-effect relationship between the variables under investigation. The research involved collecting panel data from 61 firms over 11-year period between 2011 and June 2021.It can be seen from the results that foreign ownership, government ownership and diffuse ownership are individually negatively correlated to corporate risk. Managerial ownership as well as government ownership have positive relationship with corporate risk. Managerial ownership, corporate ownership and diffuse ownership all document an insignificant effect on corporate risk. The research findings also indicate that agency costs have a negligible mediating effect on the nexus between ownership structure and corporate risk . On the contrary, board independence was revealed to have a significant effect on the nexus between ownership structure and corporate risk . Additionally, the study shows that a combination of ownership structure, agency costs, and board independence significantly affects corporate risk. Regarding ownership structure, the research recommends distributing ownership among a broad array of shareholders to mitigate the risk of excessive control by one or a few shareholders, whose decisions could harm the company. Excessive managerial ownership might lead to riskier decision-making or increased risk-taking behavior. The study proposes increased corporate ownership where having a significant portion of ownership held by corporate investors can reduce risk as these investors are typically long-term oriented and have a stake in the stability and success of the company. Firms can consider attracting or increasing foreign ownership as a strategy to reduce corporate risk. Foreign investors might bring diversified expertise, better risk management practices, and access to international markets, contributing to overall risk reduction. Firms with government ownership should focus on enhancing their risk management frameworks. This includes developing robust risk assessment procedures, implementing more rigorous internal controls, and adopting advanced risk mitigation strategies to counteract the higher risk associated with government ownership. The study additionally suggests a balance of power on the boards. The boards should have proper combination of independent and non-independent directors to prevent undue influence from the management. On agency cost, the study suggests that the firms should have systems in place that monitor and control the behavior of employees and managers. This helps to reduce agency costs by reducing the likelihood of unethical or harmful behavior.