Determinants of Dividend Payout in Emerging Stock Markets: Evidence from Listed Firms at Nairobi Securities Exchange, Kenya

Abstract

Dividend decisions are central to corporate finance because of its relationship with firm value, finance and investment. Emerging stock markets exhibit unpredictable dividend behaviour with inconsistent results from same dividend factors. The major issue preoccupying corporate dividend decisions today is how to make value enhancing dividend decisions. Investors and corporate managers in Kenya require a more efficient and effective dividend model to help with making better dividend decisions. Particularly they would benefit from findings on how well an extended partial adjustment dividend model serve to predict dividend policy at the NSE. In general, the investigation examines how profitability (measured by current after tax earnings), prior dividends paid, growth prospects (measured by market to book ratio) and business risk (measured by price to earnings ratio) predict dividend decisions at the Nairobi Securities Exchange. In addition to determine stability and validity of dividend decisions in this market to inform better investment and financing decisions in the market. A triangulation approach is used to compare results from panel and cross section data. Panel data estimation techniques was used to explain determinants of dividend policy while a logistic regression is applied in analysing cross section data. The industry and time effects are tested as moderators. The results show that prior dividends and business risk characterize dividend decisions in this market. However, earnings only apply to three sectors (Agriculture, banking and Construction) while growth prospects is irrelevant to dividend decisions based on data analysed. Industry and time effects did not moderate the relationship between dividend policy and the determinants. Conversely, stability tests indicate stickiness in the variability of dividend which imply some form of smoothing for dividends pursued by managers. In conclusion, dividends payout by listed firms at the NSE are significantly influenced and predicted mainly by prior dividends as evidenced by panel and cross section data, followed by changes in current after tax earnings and lastly business risk to a lesser extent. Secondly, listed companies pay out stable dividend while dividend policy in the market is explained by asymmetric information, agency and signaling theories. Third dividend payout in this market is explained by agency cost, signaling and information asymmetry theories. Key recommendations arising are; shareholders and new investors at NSE looking for dividend income should consider prior dividends and earnings changes when selecting stock(s) to buy or sell. Secondly, dividend payout need to be stabilized more by corporate managers to enhance value especially for firms in sectors facing high risk and growth prospects. Third, dividend paying (increase or decrease) firms are preferred by investors to non-paying (No dividend change) firms because changes in dividends elicit excitement among investors compared to keeping dividend unchanged. Finally,based on the panel data analysed, management of three companies namely Bamburi Cement, Kapchorua Tea and BOC Ltd possessed superior talent compared to other firms in their respective industries.