Effect of Agency Costs on Financial Performance of Listed Companies in Nigeria

Abstract

This study investigated the effect of agency costs proxied by monitoring costs, bonding costs, and residual loss on financial performance as well as a comparative examination of listed financial and non-financial companies in Nigeria, using the ex-post facto research design.  The study used a sample of 10 financial and 10 non-financial companies from a population of 157companies listed on the NGX from 2011 to 2020 using the filtering and random methods. Data were sourced from annual reports of the sampled companies and MachameRatios. Panel regression estimate was used for data analysis and findings show that monitoring costs and residual loss exert a significant positive effect, while bonding cost insignificantly and adversely affect the financial performance of listed financial companies, of listed financial companies in Nigeria. These results support the agency theory which calls for close monitoring of entrenched managers. The study further established that while significant differences exists in the effect of monitoring costs and residual loss on financial performance, a non-significant difference exist in the effect of bonding cost on financial performance of listed financial and non-financial companies in Nigeria. The study, therefore, recommended that companies in the financial sector should prioritize agency cost in the form of monitoring cost and residual loss as they exert significant effect on financial performance. The study also recommended that companies in the non-financial sector should prioritize agency cost in the form of bonding cost as it exerts significant influence on financial performance in the companies.