The Impact of Agency Costs on Financial Peformance of Commercial Banks in Kenya
Abstract
Agency costs stem from conflicts of interests that exist in a principal-agent relationship.
The relationship is usually created since the principal may not be in position to undertake
the tasks, either due to lack in technical know-how, or any other factor that would make it
essential for the principal to seek the services of an agent. There are various principalagent
relationships in a commercial bank with the most common being shareholder
versus management relationship. Agency costs are hereby incurred with the aim of
aligning the goals of the agents to those of the principal and therefore lead to
achievement of the principal’s overall goals. This study was therefore designed to
examine the impact of agency costs and the consequences thereof, on financial
performance. A research methodology that looks into relationships between variables is
descriptive design of research. It was therefore employed in this study in obtaining both
the general and the specific objectives of the study. The study did a census of the 42
licensed commercial banks in the country. However complete information for all the
variables for the five years under study between 2013 and 2017 was obtained for 26
banks only which was a response rate of 61.9%. Data was analyzed by use of SPSS
Version 20.0 and various tables, means, percentages, and variations were obtained as
output. The output in summary, showed a positive significant relationship between
agency costs and financial performance of commercial banks. The finding led to the
conclusion that commercial banks in Kenya that make significant investment on issues of
directors remuneration and auditors remuneration end up having better financial
performance as the agents are motivated to achieve the desired goals by the principals as
this would result to achieving their goals as well. Increasing remuneration of the auditor
enhances the monitoring of financial issues that compels the management to comply with
the needs of the shareholders.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
The following license files are associated with this item: