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EFFECTS OF AGENCY COSTS ON FINANCIAL PERFORMANCE OF COMPANIES LISTED AT THE NAIROBI SECURITIES EXCHANGE


Patrick Wambua


ABSTRACT

The purpose of this study was to establish the effects of agency costs on financial performance of companies listed at the Nairobi Securities exchange (NSE). In particular the study sought to investigate the effect of board independence, executive compensation, board size, free cash flows and chief executive duality on financial performance. Descriptive research design was adopted with target population being individuals working in the public listed companies in Kenya. The study used questionnaire as the primary tool to collect the required data while secondary data was sourced from published information about the current performance of the public listed companies and the implications resulting from the agency costs. The pilot study was conducted using questionnaires. Descriptive statistics such as means, standard deviation, frequency distribution and percentages were used to analyze the data. From the study we can conclude that firm’s chief executive duality, executive remuneration, board independence, board size and free cash flow are all significant at 95 percent confidence level. This study reveals that, free cash flow is the most important in determining financial performance compared to other variables. Based onthe findings of this study, it can be revealed that, liquidity level of a firm is paramount in financial performance of any organization. Towards this end, the study recommends that organizations should consider form a lean but standard size board of director that would ensure efficiency in cash flow. The directors’ compensations would translate to the amount of money flowing out in form of allowances and monthly compensations.


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