Incentive and entrenchment effects of a large Shareholder for companies listed in Nairobi Stock exchange (NSE)

Abstract

This study sought to establish the extent to which the largest shareholder affects the value of the firm. The incentive effects come about when the interests of the largest shareholder and those of the firm are the same. The findings showed that at lower percentage levels of the largest shareholder the value of the firm is functionally rising reaching an optimum at within the 30 - 60 % range, after which the entrenchment effects start to set in and very steeply so, such that the value of the firm starts to decline drastically. This is typical of divergence of the largest shareholders interests and those of the firm as the largest shareholder can pursue and pass through the board practically all operational and managerial decisions without resort to the minority shareholders. The results thus showed that there was an optimum percentage' level at which the largest shareholder is recommended for firms quoted at the Nairobi Stock Exchange (NSE) which is between 30 % and 60 %. Within this range, the value of the firm with a large shareholder is highest. The study also showed that it is better for the firm to have a large shareholder at levels below 30 % than at levels higher than 70 %