Ownership structure and its effect on Corporate Dividend Policy for companies listed at the Nairobi Security Exchange

Abstract

This study investigates the relationship between types of ownership structure and dividend payments of Nairobi Securities Exchange (NSE) listed companies. A cross-sectional analysis of 33 sample firms for the years 2009 to 2011 was utilized.

The study examined the explanatory power of three alternative models of dividend policy, the full adjustment model, the partial adjustment model and the Waud model which are moderated by the possible effects of four types of ownership structure, namely ownership concentration, institutional ownership, managerial ownership and foreign ownership. Ownership concentration is measured by the summation of the percentage of shares controlled by ten major shareholders. Institutional ownership is measured by a percentage of equity owned by institutional investors, while, managerial ownership is measured by adding the total percentage of shares directly held by directors in the company, and foreign ownership is measured by the sum of all shares in the hands of foreign shareholders in the list of ten largest shareholders, either held through nominee companies or other corporate foreign share holdings.

The study found that The partial adjustment model had the highest explanatory power. It was also found that ownership concentration was the only variable that was positively and statistically significant in influencing dividends in every type of dividend model, a finding that is consistent with agency theory. This finding has policy implication since high dividend payments can be used for mitigating agency conflict as dividends can be substituted for shareholder monitoring. Hence, large shareholders have strong incentives to require higher dividend payments in order to reduce monitoring costs. Nevertheless, this study shows that dividend decisions of Kenyan companies are not influenced by the Structure of ownership.