Publication: Analysis of the effects of agency costs on financial performance of commercial banks listed at the Nairobi securities exchange in Mombasa county, Kenya
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2024-05
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Mount Kenya University
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Abstract
Conflicting interests in a principal-agent relationship lead to agency costs. The
relationship arises from the principal's hiring of the agent since they may not be able
to manage the business due to their lack of technological knowledge, large number,
and geographic dispersion. Principal agent connections can take many different
forms in a commercial bank, the most common being the connection between
shareholders and management. Agency fees are paid with the goal of coordinating
the goals of the principal and the agents to achieve the principal's ultimate objectives
Thus, the purpose of this study's persistence was to examine agency costs and how
they affect financial performance. This study examined the impact of agency costs on
public commercial banks' financial performance. The study was specifically directed
by the following goals: to determine the impact of restructuring costs on the financial
performance of listed commercial banks in Mombasa County; to evaluate the effect
of bonding costs on the financial performance of listed commercial banks in
Mombasa County; to find out how monitoring costs affect the financial performance
of quoted commercial banks in Mombasa County; and to investigate the degree to
which residual loss affects the financial performance of commercial banks in
Mombasa County. The following theories provided support for this study:
stakeholder theory, free cash flow, and agency theories. One type of research
methodology that establishes the relationship between variables is descriptive design.
It was applied in this investigation to determine the general and specific study
objectives. Purposive sampling was employed in conjunction with a census of
Mombasa County's ten listed commercial banks. Both qualitative and quantitative
analysis were used in this study. Validity and reliability were evaluated using a pilot
test. While Cronbach alpha was used to verify reliability, interviews were used to test
validity. Using the Statistical Package for Social Science (SPSS) Version 22.0, the
data was analysed using both descriptive and inferential statistics, such as mean and
standard deviation, and regression and correlation. Charts, frequency tables, and
cross tabulation were used to present the data. The results showed a strong positive
association (β1= 0.011, p < 0.05) between financial success and cost monitoring.
Bonding cost and financial performance were positively and significantly correlated
(β2 = 0.008, p<0.05). A negative and statistically significant correlation was found
between residual loss and financial performance (β3 = -0.003, p<0.05). Financial
performance and restructuring costs had a positive and statistically significant link
(β4=0.006, p <0.05). The research recommends that management of listed
commercial banks establish an effective internal control system. This will help
reduce the cost of auditing, administrative expenses, and unnecessary and wasteful
spending. Managers should receive higher compensation and have the ability to link
their share bonuses or option entitlements to specific firm performance. They should
also implement a restructuring plan that is in line with the company's goals and
strategy.
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Keywords
Technological knowledge, Geographic dispersion, Financial success, Compensation