The Relationship between Capital Structure and Agency Cost of Companies Listed In the Nairobi Security Exchange in Kenya

It is widely acknowledged that managerial interests are not aligned with shareholders interest. With this scenario then, in the presence of free cash flows in Companies, managers tend to incur higher expenditure which raises the overall cost, consequently reducing asset turnover. Therefore the choice of capital structure could help mitigate against these agency cost. The purpose of this study was to assess the relationship between capital structure and agency cost of companies listed on the Nairobi security Exchange in Kenya. The study adopted a quantitative approach and the target population was 45 listed Companies on the Nairobi Security Exchange for a period of eight years between 2000 and 2007. A purposive sample of 20 non-financial firms was used, secondary data collected and analysed using statistical power for excel. The findings indicated that, in high growth firms, there was a strong relationship between debt and efficiency ratio, but weak relationship between debt and asset turnover ratio. In low growth firms, there was a strong relationship between debt and asset turnover ratios and a weak relationship between debt and efficient ratio. It was concluded that, the use of debt decreases expenses in high growth firms but increases asset turnover in low growth firms. The study recommends that high growth firms should use debts to reduce expenses and low growth firms should utilize debt to increase assets turnover ratio. Therefore firms could reduce agency costs by using debt in their capital structure.