Patrick Kinyua Mukoma, James N. Kung’u, David M. Gichuhi


Academic and business research has focused on the competing interests of shareholders and managers, as well as the resulting agency fees. It is well known that managers have a strong desire to advance their own interests, such as their pay, the size of their companies, and the value of their securities. According to agency theory, shareholders will pay agency costs in order to reduce these conflicts. According to the free cash flow principle, when a company creates considerable free cash flow, there are significant agency conflicts between stockholders and executives. A number of empirical studies have proposed solutions to this problem, one of which is the use of a capital structure. Numerous studies on the effect of capital structures on agency costs have been conducted, with varying degrees of success. However, the majority of these studies took place in industrialized nations. The primary goal of this study, which lasted from 2012 to 2018, was to determine how capital configuration affected agency expenses in Kenyan commercial and service firms that were listed on the Nairobi Securities Exchange. The study's specific goals included investigating the effects of equity on agency costs, retained earnings on agency costs, long-term debt on agency costs, and firm size as a moderator of the effects of investment configuration on agency costs. A descriptive research method was used in this study to provide a thorough examination of the relationship between capital structure and agency costs. To collect the required seven-year panel data from the entire population of firms, the Nairobi Securities Exchange, the Capital Market Authority's data banks, and the firms' websites were used. These data were then examined at two levels of statistics: descriptive statistics and inferential statistics. In Kenyan commercial and service firms, variations in equity capital, retained earnings, and long-term debts jointly accounted for 65.9% of the variations in agency costs, according to the regression results.

JEL: E22; G31; L10


Article visualizations:

Hit counter


agency costs, capital structure, commercial and services firms, equity capital, firm size

Full Text:



Aderemi, A., Foyeke, O. & Olusola, F. (2016). Financial Structure and the Profitability of Manufacturing Companies in Nigeria. Journal of Accounting, Finance and Auditing Studies, 2(8), 56-63.

Armstrong J. (2017). What Is a Commercial Company? Main Characteristics. https://www.lifepersona.com/what-is-a-commercial-company-main-characteristics. accessed 20 January 2018

Atif A. & Quaiser A. (2015). Firm size moderating financial performance in growing firms: An empirical evidence from Pakistan. International Journal of Economics and Financial Issues, 5(2), 334-339.

Atumwa, E. C. (2013). Relationship between agency cost and leverage for companies listed at the Nairobi Securities Exchange. Doctoral dissertation, University of Nairobi, School of Business.

Baker, K., & Powell, G. (2009). Understanding financial management: A practical guide. New Jersey, USA: Willy-Blackwell.

Baumol, W. J. (1959). Business Behavior, Value and Growth. New York: Macmillan.

Berle, A., & Means, G. (1932). The Modern Corporation and Private Property: The Military Roots of a Stakeholder Model of Corporate Governance. New York, USA: Transaction Publishers.

Brooks, C. (2019). Stata Guide to Introductory Econometrics for Finance. London, UK: Cambridge University Press.

Chasan, E. (2012). Mid-size Firms Tap Retained Earnings to Fund Growth. Wall Street Journal.

Chechet I. & Olayiwora T. (2014). Capital Structure and Profitability of Nigerian Quoted Firms: The Agency Cost Theory Perspective. American International Journal of Social Science, 3(1), 139-158.

Gui F.A., Tsui J. (1998). A Test of the Free Cashflow Debt Monitoring Hypothesis: Evidence from Auding Pricing. Journal of Accounting and Economics, 24, 219- 237.

Gul, S., Malik, F., Razzaqr, N., & Siddiqui, M. (2013). International Corporate Governance Mechanisms and Agency Costs: Evidence from Large KSE Listed Firms. European Journal of Business and Management, 5(23), 2222- 2839.

Habib, H.; Khan F.; Wazir M. (2016). Impact of Debt on Profitability of Firms: Evidence from non-Financial Sector of Pakistan. City University Research Journal, 6(1), 70- 80.

Javed F.& Shah F. (2015). Impact of Retained Earnings on Stock Returns of Food and Personal Care Goods Industry Listed in Karachi Stock Exchange. International Journal of Scientific and Research Publications, 3(11), 397- 407.

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Khan A., Kaleem A. & Nasir M. (2012). Voluntarily Contributions and Agency Costs of Free Cash Flow: Evidence from Manufacturing Sector of Pakistan. Journal of Basic and Applied Scientific Research, 2(7), 6882-6888.

Kittony, J. K. (2014). The Nature, size, and reforms in public domestic debt and their effects on economic growth in Kenya. Doctoral dissertation, University of Nairobi.

Krasauskate, E. (2011). Capital Structure of SMEs: Does Firm Size Matter?: Empirical Investigation of Baltic Countries. Aarhus University of Business and Society Science, Master’s Thesis, 1-88.

Kubai, F. B. (2016). The Effects of Capital Structure on Financial Performance of Manufacturing Firms in Kenya. Nairobi: Unpublished Research Project of the University of Nairobi.

Lemein, S. (2018). Effects of Corporate Taxes on Capital Structure of Commercial and Services Firms Listed at the Nairobi Securities Exchange. Doctoral dissertation of the University of Nairobi.

Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership, and firm performance. Journal of banking & finance, 34(3), 621-632.

Marieta, S. M. (2012). The influence of capital structure on firms’ performance: A case of selected firms listed in Nairobi Securities Exchange. Masters of Arts Degree Dissertation, University of Nairobi.

Mekha, P. G., Lakshmi, S. M., & Suresha, B. (2019). Determinants of Capital Structure-An Evidence from Indian BFSI Sector. Asian Journal of Management, 10(2), 115-118.

Mohamed, A. A. (2010). Signaling Effects of Dividend Payment on the Earnings of the Firm: Evidence from Nairobi Stock Exchange. Nairobi: University of Nairobi.

Moore, N. (2006). The Contexts of Context: Broadening Perspectives in the (Re)use of Qualitative Data. Methodological Innovations Online, 1(2), 21- 32.

Mu'azu, S. B. (2016). The Moderating Effects of Firm Size on the Relationship between Board Structure and Financial Performance of Deposit Money Banks in Nigeria. Sahel Analyst: Journal of Management Sciences, 14(3), 101-115.

Nawaz A., Rizwan A. & Naseem M. (2011). Capital Structure and Financial Performance: a case of textile Sector in Pakistan. Global Business and Management: An International Journal, 3(3), 270-275.

Nazir S. & Saita H. (2013). Financial Leverage and Agency Costs: An Empirical Evidence of Pakistan. International Journal of Innovative and Applied Finance, 3(2), 1-16.

Nwedi, E., & Anyalechi, K. (2018). Impact of Capital Structure of Performance of Commercial Banks in Nigeria. International Journal of Economics and Finance, 8(2), 298- 303.

Onsumu, P. G. (2014). The relationship between capital structure and agency costs of firms listed at the Nairobi Securities Exchange. Unpublished MBA Project, University of Nairobi.

Robert G. & Jane G. (2017). The Moderating Effects of Firm Size on the Relationship between Capital Structure and Financial Distress on non-Financial Companies listed in Kenya. Journal of Finance and Accounting, 5(4), 151-158.

Ronoh, C. (2015). Effects of Capital Structure on Financial Performance of Listed Commercial Banks in Kenya: A Case Study of Kenya Commercial Bank Limited. The Strategic Journal of Business and Change Management, 2(72), 750- 781.

Ross, S. A. (1973). The Economic Theory of Agency: The Principal's Problem. The American Economic Review, 134- 139.

Ross, S. A., Westerfield, R., & Jordan, B. D. (2008). Fundamentals of corporate finance. New Delhi, India: Tata McGraw-Hill Education.

Saad, N. M. (2010). Corporate governance compliance and the effects on capital structure in Malaysia. International Journal of Economics and Finance, 2(1), 105-114.

Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3-27.

Thuranira, M. G. (2014). The Effects of Retained Earnings on the Returns of Firms Listed at the Nairobi Securities Exchange. Unpublished Research Paper, University of Nairobi.

Tirole, J. (2003). Inefficient Foreign Borrowing: A Dual- and Common-Agency Perspective. American Economic Review, 93(5), 1678- 1702.

Wang, G. Y. (2010). The impacts of free cash flows and agency costs on firm performance. Journal of Service Science and Management, 3(4), 408-418.

Wolk, H. I., Dodd, J. L. & Rozycki, J. J. (2008). Accounting theory: conceptual issues in a political and economic environment. Thousand Oaks: Sage Publications.

Zheng, M. (2013). Empirical research of the impact of capital structure on agency cost of Chinese listed companies. International Journal of Economics and Finance, 5(10), 118-125

DOI: http://dx.doi.org/10.46827/ejefr.v7i4.1602


  • There are currently no refbacks.

Copyright (c) 2023 Patrick Kinyua Mukoma, James N. Kung’u, David M. Gichuhi

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

The research works published in this journal are free to be accessed. They can be shared (copied and redistributed in any medium or format) and\or adapted (remixed, transformed, and built upon the material for any purpose, commercially and\or not commercially) under the following terms: attribution (appropriate credit must be given indicating original authors, research work name and publication name mentioning if changes were made) and without adding additional restrictions (without restricting others from doing anything the actual license permits). Authors retain the full copyright of their published research works and cannot revoke these freedoms as long as the license terms are followed.

Copyright © 2016 - 2023. European Journal of Economic and Financial Research (ISSN 2501-9430) is a registered trademark of Open Access Publishing GroupAll rights reserved.

This journal is a serial publication uniquely identified by an International Standard Serial Number (ISSN) serial number certificate issued by Romanian National Library. All the research works are uniquely identified by a CrossRef DOI digital object identifier supplied by indexing and repository platforms. All the research works published on this journal are meeting the Open Access Publishing requirements and standards formulated by Budapest Open Access Initiative (2002), the Bethesda Statement on Open Access Publishing (2003) and  Berlin Declaration on Open Access to Knowledge in the Sciences and Humanities (2003) and can be freely accessed, shared, modified, distributed and used in educational, commercial and non-commercial purposes under a Creative Commons Attribution 4.0 International License. Copyrights of the published research works are retained by authors.