Ownership Structure, Agency Costs, Board Independence and Corporate Risk among Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

This study explored how ownership structure influences corporate risk in firms listed on the Nairobi Securities Exchange, with agency costs acting as a mediator and board independence as a moderator. Guided by agency theory and supported by mean variance-portfolio theory, stewardship theory, and resource dependence theory, the research adopted a positivist approach and employed a causal survey design to investigate the relationships between ownership structure, agency costs, board independence, and corporate risk. Panel data from 61 firms over an 11-year period (2011-2021) was analyzed. Panel data regression analysis was employed. The findings revealed that foreign ownership, government ownership, and diffuse ownership were negatively correlated with corporate risk, while managerial ownership showed a positive relationship with risk. However, managerial, corporate, and diffuse ownership had insignificant effects on corporate risk. Agency costs had a minimal mediating effect, but board independence significantly influenced the relationship between ownership structure and corporate risk. The study recommends that policymakers and regulators enforce limits on managerial ownership to prevent excessive control, encourage a broader distribution of shareholders, increase corporate and foreign ownership to reduce risk, and improve risk management frameworks for government-owned firms. Corporate managers should maintain a balanced board mix of independent and non-independent directors, establish conflict-of-interest policies, foster open communication, ensure that independent directors have a significant role in decision-making, and regularly review board composition. Additionally, managers should implement systems to monitor employee behavior, promote clear communication regarding company objectives, and offer performance-based incentives to reduce agency costs. In conclusion, the study highlights the complex interplay between ownership structure, agency costs, and board independence in shaping corporate risk, with practical implications for firms seeking to manage and reduce their risk exposure.