Agency Cost and Credit Risk Management: Empirical Evidence from Listed Commercial Banks in Nigeria

Abstract

This study explores the relationship between agency cost and credit risk of quoted commercial banks in Nigeria. Five hypotheses were formulated following the dependent variable of credit risk which we proxy as non-performing loan. The independent variables employed for this study include agency cost, profitability, income diversification, corporate governance and firm leverage. This study is based on ex-post facto research design and made use of panel data set collected from twelve (12) quoted commercial banks within thirteen years of 2007 and 2019 financial year. We analyzed the data set using a random effect regression analysis. The result showed that agency cost which is measured as managerial inefficiency is strongly and positively related to the non-performing loan of commercial banks in Nigeria during the period under investigation. However, in light of the obtained result, we recommend that bank managers in Nigeria should take a keen look at the activities that make up agency cost. Hence, they should consider new policies that will lower the size of its agency cost to reduce the level of nonperforming loans which will ultimately create room for greater profit.