The Relationship Between Dividend Payout Ratio and the Value of the Firm for Companies Listed at the Nairobi Securities Exchange

Abstract

Decision making about dividend payout is one of the most important decision that companies encounter with. Dividend payout ratio is dependent on lots of elements such as investing opportunities, profitability, income tax, laws obligation and liquidity. The objective of the study was to determine the relationship between dividend payout ratio and the value of the firm for companies listed at the Nairobi Securities Exchange. The study period was a six year period i.e 2008-2013.This study involved the use of a descriptive research design. Using a sample of 29 listed firms which were randomly selected the study employed secondary data. The population of interest consisted of all the 61 listed firms in Kenya. This study found that there was a significant relationship between dividend payout ratio and the value of the firm for companies listed at NSE. Except liquidity, the other variables (dividend payout ratio, growth opportunity, and profitability) had a significant impact on the value of the firm since their p-value was less than the accepted critical value. In addition analysis of variance showed that the combined effect of dividend payout ratio, current ratio, liquidity and growth opportunity was statistically significant in explaining changes in value of the firm of listed companies in Kenya. This further implied that the overall model was significant. According to this study, the eleven sectors of the NSE recorded a varying R square with the banking sector recording the highest while the telecommunication sector had the lowest R square .Correlation coefficient was also used to determine the relationship between the variables and concluded that dividend payout ratio had a positive correlation with the value of the firm. The other variables had also a positive correlation with the value of the firm but liquidity had a very weak relationship compared to other variables. The study recommends that since dividend policy has an effect on the value of the firms quoted at NSE, companies should pay dividends to maintain a high firm value. In carrying out the dividend payout decision, the management should also consider other factors such as liquidity, growth opportunities, current ratio etc since they have an impact on the value of the firm, despite paying dividends consistently and having a clear dividend policy