The Impact of Corporate Governance on Agency Cost: Empirical Analysis of Quoted Services Firms in Kenya

Abstract

The effect of corporate governance on firm performance has long been of great interest to financiers, economists, behavioural scientists, legal practitioners and business operators. Yet there is no consensus over what constitutes an effective corporate governance mechanism that induces agents or managers to consistently act in the interest of share value optimization. The purpose of this study is to investigate the role of corporate governance in mitigating agency cost in a sample of 9 service firms selected on the basis of market capitalization from Nairobi Securities Exchange during the period 2008-2012. We used the proxy asset utilization ratio to measure agency cost. Multivariate fixed effect regression is used to analyze the data. The explanatory variables include director ownership, institutional ownership, external ownership, board size, CEO/Chair duality, remuneration structure and board independence. The results show that higher director and institutional ownership reduces the level of agency cost. Smaller sized boards also results in lowering agency cost. Board independence has positive association with asset utilization ratio. The separation of the post of CEO and chairperson and higher remuneration lower agency cost.

Keywords: Corporate governance, Agency cost, Multivariate fixed effect regression