A Test of Relationship Between Capital Structure and Agency Costs: Evidence From the Nairobi Stock Exchange
Abstract
The financing decision is one of the most important roles played by a modern finance
manager as it determines the value of a firm. Managers strive to maintain a capital
structure that maximizes the shareholders wealth while minimizing financial and business
risk of the firm. A traditional view on corporate finance assert that firms strive to
maintain an optimal capital structure that balances the costs and value associated with
varying degrees of financial leverage.
The study was an empirical study of the firms listed on Nairobi Stock Exchange (NSE).
The population consisted of all the 54 companies quoted at the NSE for the years 2005 to
2009. The study sampled all companies listed at the Nairobi Stock Exchange, excluding
financial sector firms (banks, insurance firms, unit trusts and other funds companies).
This study was facilitated by the use of secondary data.
The study found out that half of the companies were unable to generate revenues that
were commensurate with the total value of assets they had, it therefore, indicate that the
management of most of the firms are inefficient in deployment of the firms’ assets to
generate revenue. This indicates that firms’ assets could cover less than 18.6% of the
firms debts for more than half the companies sampled. However, in the five regression
analyses done size generally had a negative relationship with capital structure and agency
cost which asserts the fact that as the size of a company increases, the agency cost would
reduce.