The Relationship Between Agency Costs and Financial Performance of Firms Listed in Nairobi Securities Exchange

Abstract

The purpose of this study was to establish the relationship between agency costs and financial performance of firms listed at the Nairobi Securities Exchange. Descriptive study was applied; the target population was all the companies in the NSE that traded continuously within the period of 5years for the year 2008 to 2012. A census was used for the firms. 52 companies were analyzed since the rest were suspended from trading at the NSE. The study was a research which utilized secondary data from companies listed in Nairobi Securities Exchange. Multiple regression analysis and correlation analysis was used to determine relationship between agency costs and financial performance at the NSE. Statistical Package for Social Sciences (SPSS) was used in the data analysis. The results of the study indicated that there is a positive relationship between agency costs and financial performance, when agency costs increases by one unit, financial performance increases by 0.02 units. The study also found that there was no multicollinearity and autocorrelation among all the variables tested. Finally a positive slope graph was obtained showing a positive relationship between financial performance and agency costs. This study concluded that the relationship between financial performance and agency costs was significant at the 5% level. The study recommended that since agency costs and financial performance are significantly related, decisions should take into account the implications of agency costs for the firms listed in NSE when taking financial decisions.