Relationship between agency cost and leverage for companies listed at the Nairobi Securities Exchange

Abstract

This study was conducted with the aim of investigating the relationship between agency cost and leverage of firms listed at the Nairobi Securities Exchange. In the context of a market where a number of de-listings, receiverships and wind-ups have occurred on account of agency conflicts, it is was necessary to conduct this study. The study was causal in nature. The population of the study comprised of all the 60 listed firms at the NSE from January 2008 to December 2011. A sample of 34 companies was studied. The study used secondary data from published audited reports of accounts for the sample firms under study. These were obtained from Nairobi Securities Exchange and the Capital Markets Authority databases. Financial data from balance sheets, profit and loss accounts and cash flow statements were used to calculate and analyze agency costs, firm size, growth in sales and return on assets. The study used a regression model which analyzed the relationship between agency cost and leverage while controlling for firm size, growth in sales and return on assets. F test was used to determine the fitness of the regression model in analyzing the relationship. The coefficient of determination was used to explain how much of the variations in leverage were explained by the independent variables. The study found the p-value of the F test to be less than alpha (0 < .05) hence concluded that there was a significant relationship between agency cost and leverage. On the basis of the findings, the study recommends that since agency costs and leverage are significantly related, leverage level variability decisions should take into account implications of costs of agency for listed firms. The results indicated that predictor variables only influenced 28.5 % of variations in leverage as indicated by the adjusted R square statistic 0.2846447.T test was also conducted at 5% level of significant. The asset utilization ratio was significant at 0.002178. Further investigation may be done to establish the effect of other agency cost surrogates.