The Relationship Between Dividend Payout Ratio and Capital Structure of Companies Listed at the Nairobi Securities Exchange

Abstract

The existing literature on optimal dividend policy and capital structure is voluminous and has continuously evolved over the last five decades. Theories on the two widely researched topics have been treated differently, even though there is reason to believe that there are common factors affecting both hence leaving us with many unanswered questions. The theories of capital structure and dividend policy are jointly determined as part of a variety of control allocations between managers and investors, and hence cross-sectional variations in both are driven by the same underlying factors.

The objective of this study was to establish the relationship between the dividend payout ratio and capital structure of companies listed at the NSE. This study relied on secondary data. The study sampled 29 companies listed at the NSE and the listed firms within financial and other regulated sectors were excluded in coming up with the sample size. Regression analysis was used to analyze the data and find out whether there exists a relationship between dividend payout ratio and capital structure.

The study found out that there is a significant relationship between dividend payout ratio and capital structure. The findings revealed that there is an inverse relationship between leverage and dividend payout ratio. The study concludes that leverage negatively affects dividend payout ratio.

Based on these results, the study recommends company’s management education, as they need to understand the factors that lead to increase or decrease in the company’s dividend payout ratio. In order for a company to increase its dividend payout ratio, it should decrease factors that lead to increase in its leverage since there is an inverse relationship between these parameters.