The Influence Of Agency Cost On Dividend Payout Of Firms Listed At The Nairobi Stock Exchange

Abstract

Dividend policy has long been an issue of interest in the financial literature. To date, a number of studies have been published on agency costs and dividend policy but most of them are on developed markets. It is well known that the emerging markets are quite different from developed markets in most respects. So, the existing published evidence is of limited relevance in identifying the influence of agency costs on dividend policy in an emerging market. The major objective of this paper is to identify the influence of agency costs on dividend policy in an emerging market. Firms listed in the Nairobi Stock Exchange for the period 1998-2002 arc considered as the sample of the study. Ordinary least square regression model was employed to identify the influence of agency costs on dividend policy in this study. I’he results confirm that there is indeed a positive correlation between the dependent variable and the independent variables. The free cash flow, the collaterizable assets and the dispersion of ownership all positively affect dividend policy. Collaterizable assets were found to be more significant in the regression while dispersion of ownership, and free cash flow were found to be less significant. All of these coefficients are in the predicted direction and quite consistent with Rozeffs (1982) and all other previous empirical evidence. 'ITic results also support Jensen’s (1986) free cash flow hypothesis.