Ownership Structure, Agency Costs, Firm Size and Value of Companies Listed at the Nairobi Securities Exchange

Abstract

When the wellbeing of managers and owners are not congruent, agency costs arise. This study intent was to explore the influence of agency costs and size of firm on the relationship between ownership structure and value of companies listed at the NSE. Specifically, the study intended to establish the relationship between ownership structure and the value of listed companies; the mediating effect of agency costs on the nexus between ownership structure and value of companies listed at the NSE; the moderating influence of firm size on the relationship between ownership structure and value of companies listed at the NSE and the joint effect of ownership structure, agency costs and firm size on value of companies at the NSE. To accomplish the stated objectives, the hypotheses formulated were: the relationship between ownership structure and value of companies listed at the NSE is not significant; the mediating effect of agency costs on the relationship between ownership structure and value of companies listed at the NSE is not significant; the moderating effect of firm size on the relationship between ownership structure and value of companies listed at the NSE is not significant; and the joint effect of ownership structure, agency costs and firm size on value of companies at the NSE is not significant. This study was anchored on agency theory that asserts the separation of ownership from management and hence occasion aspects of agency problems that affect may firm value. The study population consisted of 65 listed firms as at 31st December 2017, however adequate data of 54 firms was obtained yielding 397 firm-year observations for the period of study from 2010 to 2017. Data was collated from listed firms’ annual integrated financial reports and licensed Share Registrars. The study adopted a positivist research philosophy. Diagnostics tests were undertaken to prepare the data for regression analysis. In the circumstance of violation of assumptions of the ordinary linear regression model, a recalculation of the panel corrected standard errors was undertaken or a transformed regression model-feasible generalized least squares that purges autocorrelation and/or heteroscedasticity was fitted. The findings were that managerial equity holdings had a statistically significant negative impact on entity value while institutional and foreign equity holdings reveal a positive significant effect on value of listed firms. The study found that the influence of ownership on value of firm is transmitted through the efficiency mechanisms in the utilization of managerial discretionary expenses in an entity. Managerial ownership also influences value indirectly via audits and non-executive directors monitoring mechanisms but is not the case for foreign and institutional ownership. Moreover, for varying sizes of entities, an enhancing influence subsits on the relationship between managerial ownership and value, and foreign equity holding and entity value. On the contrary, the nature of relationship between institutional holdings and entity value does not change for all levels of firm sizes. Managerial holdings and discretionary expenses have a negative link while institutional and foreign holdings and monitoring cost depict positive statistically significant joint impact on value of firm. However, firm size has a positive though not significant joint effect on value. The study expands the existing base of knowledge on ownership and value by incorporating concept of agency costs while considering Kenya listed firms context. The implication for policy and practise is to incorporate institutional and foreign ownership holdings as positive drivers of value. However, effectiveness and policy relevance of stock options compensation schemes for management should be reassessed since ownership by management negatively affect value. There is also a need to enhance existing monitoring mechanisms so as to maximize value of firm. This study was limited to listed firms in Kenya. Study extensions can probe the ownership and value relationship by targeting annual changes in ownership holdings in order to offer additional insights. Further, alternative proxies for agency costs and entity age can be integrated to offer ancillary comprehension of the link between ownership identities and value.