The Effect of Debt Financing on Dividend Policy of Firms Listed at Nairobi Securities Exchange

Abstract

Firms engage in three critical decisions namely, financing, investment and dividend. Financing decisions entails how firms source for funds through debt and equity financing while investment decisions entail how the sourced funds are invested into profitable projects for expansions and growth. Dividend decisions entail how generated profits are distributed among the shareholders. The objective of the study was to establish the effect of debt financing on dividend policy of firms listed at the Nairobi Securities Exchange between 2009 to 2013.The study employed longitudinal research design that used secondary quantitative data from financial statements of sampled firms listed at the NSE. The study considered a population of sixty three quoted firms at the NSE as at 31st December 2013. Purposive sampling design was used to select the sample size of non financial forty one firms listed at the NSE from 2009 to 2013. Analyzed data was presented in form of pie charts, graphs and tables. Descriptive and inferential statistics was applied to assess the relationship between dividend policy and debt financing of firms listed at the NSE. The study sought to find out whether there exists a relationship between debt financing and dividend policy for firms listed at the NSE between 2009 to 2013.The study findings concludes that a negative relationship does exist. The study supports previous research done by Brealey and Myers (2000) and Asif, et all. (2011) who concluded that there exists a negative association between financial leverage and dividend policies employed by firms. The study had the limitations of use of secondary data with high likelihood of impairment, time constraints and using few samples from selected listed firms. The study recommends further research on other factors that affect dividend policy of firms, non listed firms that are the majority and sector specific segments among others.