Relationship between capital structure and agency cost for companies listed at the Nairobi Stock Exchange

Abstract

This study set out to achieve the following two objectives:- • To determine whether there exist a relationship between capital structure and agency costs for firms listed in the Nairobi Stock Exchange • To test whether the relationship between capital structure and agency cost differ between high growth firms and low growth firms. The study investigates whether the use of debt in capital structure can reduce conflict between shareholders and managers’. The population of the study included all companies listed in the Nairobi Stock Exchange registered as at 31’st December 2007.Secondary data was obtained form Nairobi Stock Exchange. The period covered was between 2000 and 2007.Data analysis was done using statistical power for Excel. Agency cost, which is the shareholders’ lost value arising due to conflict between shareholders and managers was measured using efficiency ratio and asset utilization ratio and capital structure was measured using debt to equity ratio. The correlation of capital structure and agency cost was carried out for the period between 2000 and 2007. The findings indicated mixed results .Overall, a weak relationship exist between capital structure and agency cost firms in Nairobi Stock Exchange. On the other hand high growth firms indicated a strong relationship between debt and efficiency ratios but very weak relationship in asset utilization ratios. In low growth firms, higher correlation coefficient was indicated in utilization ratio than in efficient ratio. It was concluded that, the use of debt decreases expenses in high growth firms but increases asset utilization in low growth firms.