The Relationship Between Financial Leverage and Dividend Pay Out Ratio of Firms Listed at the Nairobi Securities Exchange

Abstract

The dividend payout policy is one of the most debated topics within corporate finance and some academics have called the company’s dividend payout policy an unsolved puzzle. Even though an extensive amount of research regarding dividends has been conducted, there is no uniform answer to the question: what are the determinants of the companies’ dividend payout ratios? The purpose of the study is to determine if there is a relationship between a number companies selected factors and the companies’ dividend payout ratios. The study reviewed previous studies and dividend theories in order to conclude which factors that potentially could have an impact on the companies’ dividend payout ratios. Based on the literature, the study tested the relationship between capital structure and dividend payout ratio. The data used in the research are secondary data collected during a time period of three years, between 2011 and 2015. The study follows a quantitative research method with a deductive approach and based the study on three dividend theories: the dividend irrelevance theory, the transaction cost theory and tax clientele effect. In order to determine whether there is a relationship between the companies selected factors and the dividend payout ratio a regression analysis was conducted i.e. both an Ordinary least square (OLS) and a multivariate analysis. The results indicate that some of the company selected factors have an impact on the companies’ dividend payout ratios and there are some differences between the companies. The large companies have higher dividend payout ratios than smaller companies. There was also a negative significant between financial leverage and dividend payout ratio.