FACTORS INFLUENCING DIVIDEND PAYOUT DECISION OF FINANCIAL AND NON-FINANCIAL COMPANIES LISTED ON NAIROBI SECURITIES EXCHANGE

Abstract

Corporate dividend payout policy is among the most contested topics in corporate finance. The question of why firms make decisions to pay or not to pay dividends remains an open topic. The reason of this study was to examine the factors influencing dividend payout decision of financial and non-financial companies listed on Nairobi Securities Exchange. The study conducted a census on 9 financial and 24 non-financial firms listed on the NSE consistently since 2003 to 2012.Panel data was analyzed using Tobit random effects model. The findings indicated that four variables; EPS and profitability  plays a key role in positively determining the amount of dividend to pay while financial leverage and business risk play a key role in negatively determining the amount to pay. Based on the findings, the study concluded that EPS, financial leverage, and business risk play a key role in making the decision to pay or not to pay dividends. Earnings per share influence the decision to pay positively while both financial leverage and business risk influences the decision to pay dividends negatively. The findings also indicated that business growth rate, the moderating effect of size and financial sector have an insignificant relationship with the amount of dividend paid. The study recommended that both current and potential investors who are predicting future dividends to be paid should take note of the firm’s financial leverage, business risk, profitability and EPS. They should expect a decision of not being paid dividends when the firm’s have high business risk and financial leverage and expect a decision of being paid dividends when the firm’s have high EPS.Investors should not rely on profitability when predicitng the decision to pay dividends. Another recommendation made by the study is that managers should incorporate policies to pay low amounts of dividends when their firms have high leverage and business risk and pay more dividends when profitability and EPS are high. However, they should not necessarily consider business growth rate in paying dividends.

Keywords: Dividend payout policy, Tobit model, NSE