Effect of corporate governance on agency costs among listed firms in Nairobi security market, Kenya

Abstract

In recent times, interest in corporate governance in the African continent has assumed highest propositions. This is probably due to the great push from the developed countries to the African countries to embrace good governance in order to attract foreign investors and to improve shareholders value. The General objective of the study is to investigate the effect of corporate governance on agency costs among listed firms in Kenya. The specific objectives of the study are; effect of board independence on agency cost, effect board size on agency, effect of CEO duality on agency cost , effect of existence of audit committee on agency cost and effect of board tenure on Agency cost. The study adopted explanatory design in order to asses cause –effect relationship. The study used descriptive statistics to analyze data (frequencies, mean, standard deviations and percentages) and inferential statistics (correlation and multiple regression), with a population of 34 listed firms operating consistently in the stock exchange during the period 2004-2010 giving a total of 238 firm year observations. Secondary data was collected through the use of a documentary analysis. The findings revealed that there is negative correlation between agency cost and board independent, there is positive correlation between agency cost and board size, CEO duality was reported to be strongly positively correlated to Agency cost, there is a positive correlation between audit committee and agency cost and Board tenure and agency cost had significant positive relationship. Regression results reveals that there is significant positive relationship between CEO-duality and agency cost (β2=0.589, this indicate that , P value =0.000), board independence affect agency cost negatively (β1=- 0.329), board tenure (β5=0.289, P value = 0.000), board size (β3=0.236, P value =0.000) and finally existence of audit committee (β4=0.185, P value =0.000 ) these were found to be significant at 95% confident to the study whereas control variables were found to be insignificant. The study concluded that having dual leadership in the firm increases the agency cost, however with more independent directors, agency cost decreases. The study recommends that managers/CEOs should emphasize on board independence, it further recommends that the CEO and chairperson roles should not be exercised by one person