The effect of dividends on financial performance of financially constrained firms listed at Nairobi securities exchange

Abstract

Dividend policy occupies a major role in the financial management of an organization and serves as a mechanism for control of a managerial opportunism.Several theories have been documented on the relevance and irrelevance of dividend policy on firm performance. Many authors continue to come up with different findings from their studies on the relevance of dividend policy. This research sought to determine the effect of dividends on financial performance of financially constrained firms listed at Nairobi securities exchange. This study carried out a census of the 41 non-financial companies that were listed for the entire period of the study (2009-2013). Data for the study wereextracted from annual reports and accounts of 41non-financial companies listed at Nairobi Securities Exchange. Performance of the companies was established by conducting the Z-score analysis on each of the companies. The Z-score analysis identified 9 companies has having been financially constrained at one point or another during the period of the study. Regression analysis was carried out to establish the effect of dividend payout, total assets and leverage on firm performance. The findings indicated that dividend payout, total assets and leverage were major factors affecting firm performance. This therefore showed that dividend policy was relevant. It can be concluded, based on the findings of this research that dividend policy is relevant and that managers should devote adequate time in designing a dividend policy that will enhance firm performance and therefore shareholder value.It is recommended that Organizations should ensure that they have a good and robust dividend policy in place because it will enhance their performance and attract investments to the organizations