Dividend policy practices in companies listed at the Nairobi stock exchange (NSE)

Abstract

The subject of corporate dividend policy has captivated financial theorists and economists for a long time, resulting in intensive theoretical modeling and empirical examinations. This research paper investigates on the significant determinants of dividend policies of the companies listed at the Nairobi Stock Exchange. A number of conflicting theoretical models lacking strong empirical support define current attempts to explain the puzzling reality of corporate dividend behavior. The purpose of this paper is to partly determine the rationale that is responsible for this inconsistent support. The results presented here are consistent with the contention that no dividend model, either separately or jointly with other models, is supported invariably. This study examines the impact of liquidity, firm size, legal and regulatory constraints, leverage, restrictions in debt contracts, growth prospect, profitability, stability of earnings, control and ownership structure on dividend behaviour of corporate firms listed at the Nairobi Stock Exchange (NSE). I carried out a ten-year study by empirically analyzing the determinants of dividend policy on a sample of 49 quoted firms in the NSE over a wider testing period from 1993 to 2002. In additon to using a wider testing period and more refined dividend measures than previous studies, I also introduced graphic scatter graph analysis to further explain the dividend behaviour in relation to the predictor variables being tested. Dividend behaviour was tested using the Multiple Regression model through panel data analysis for the full sample of observations from 1993-2002. Further results have been obtained using a questionnaire, which was circulated to all NSE firms. The results from these two methodologies have included rankings of the predictor variables in order of the respective significance and importance. The empirical results revealed that the dividend policies of Kenyan firms (all companies collectively) quoted at the NSE depend on the growth prospect, leverage, profitability, liquidity and stability of earnings, which validate Lintner/ Brittain's model. On the other hand the sector-by-sector analysis reveals that profit rate and leverage appear to be most significant in the Agricultural sector. The Commercial sector exhibits that stability of earnings, expected growth and liquidity are the most influential variables. In the Financial sector stability of earnings, firm size and expected growth have been found to greatly influence dividends whereas in the industrial sector stability of earnings, liquidity, leverage and expected growth are the key predictor variables