Free Cash Flows, Agency Costs and Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

Firm performance is affected by various factors, both internal and external. Internal factors include firm characteristics such as firm size, age, liquidity, leverage, profitability, growth prospects among others. External factors include regulation, agency costs and general macro-economic factors. This paper sought to establish the influence of agency costs on the relationship between free cash flows and firm performance. The second objective was to assess the influence of agency costs on the relationship between free cash flows and performance of firms listed at the Nairobi securities exchange. The study used both primary data and secondary panel data which were obtained from all firms listed at the NSE for the period 2006 to 2015. Panel data and simple regression analyses using OLS were employed in the study. Results indicate that free cash flows have a significant positive relationship with firm performance, and, agency costs have a positive significant moderating effect on the relationship between free cash flows and firm performance. All the predictor variables had a joint positive and significant effect on performance. The main academic contribution of the study is that free cash flows have a positive relationship with firm performance and that agency costs; and specifically, firm monitoring and corporate governance has a positive and significant effect on the performance of firms listed at the NSE. Firm managers, shareholders, practitioners, the government and other regulators should, therefore, enhance firm monitoring and corporate governance because the benefits derived from investing therein seem to outweigh the costs.