An empirical assessment of the effect of dividend yield on the link between firm liquidity and value of firms listed at the Nairobi Securities Exchange

Abstract

This study examines the effect of dividend yield on the connection between firm liquidity and firm value among companies listed on the Nairobi Securities Exchange (NSE). It defines firm liquidity through measures such as short-term liquidity, asset convertibility, and new debt liquidity, while dividend yield is assessed via dividends paid, and firm value is indicated by Tobin’s Q. The study is guided by theories including the Operating and Cash Conversion Cycle, Dividend Signaling, and Size Effect, investigating the influence of dividend yield on the liquidity-value relationship, which remains inconclusive in emerging markets. Employing a positivist framework and a descriptive design, the study analyzed panel data from 2007 to 2022, implementing diagnostic tests for various statistical properties, followed by regression and mediation analysis using both the Baron and Kenny method and the Sobel test. The findings reveal that firm liquidity positively affects firm value, but dividend yield does not mediate this relationship. Additionally, larger firms exhibit a strengthened link between liquidity and value. The study emphasizes the importance of liquidity for enhancing firm value and recommends strategic management of liquidity and dividends, along with suggestions for further investigation into sectoral and cross-country differences.