The Effect of Debt Financing on Dividend Policy of Firms Listed at Nairobi Securities Exchange

Abstract

A firm’s value is affected by the debt and dividend policy; the two decisions can either be attributed to the mode of security, how it is distributed, or how the ownership cuts across. Therefore a firms’ financing decisions is affected by the mix between equity and debt, the relative number of debt and debt holders and how proceeds arising from investments like interests, dividends and capital gains are distributed. However, the method used to finance the investments should not affect the investment decision and neither should it affect the firm value. This study sought to determine to debt financing effect on dividend payout ratio of listed companies on the NSE. The population for the study was all the 64 companies listed at NSE. The independent variables for the study were debt financing as measured by debt ratio, liquidity as measured by current ratio, firm size as measured by natural logarithm of total assets and profitability as measured by return on equity. Dividend payout ratio was the dependent variable and was measured by dividend per share divided by earnings per share. Secondary data was collected for a period of 5 years (January 2012 to December 2016) on an annual basis. The study employed a descriptive cross-sectional research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0.068 which means that about 6.8 percent of the variation in dividend payout ratio of listed companies in Kenya can be explained by the four selected independent variables while 93.2 percent in the variation of dividend payout ratio was associated with other factors not covered in this research. The study also found that the independent variables had a weak correlation with financial performance (R=0.262). ANOVA results show that the F statistic was significant at 5% level with a p=0.000. Therefore the model was fit to explain the selected variables relationship. The results further revealed that debt financing produced negative and statistically significant values for this study while firm size produced positive but statistically significant values. Liquidity and profitability were found to be insignificant determiners of dividend payout ratio. The study recommends that when firms are setting their capital structure they should strike a balance between the tax savings benefit of debt and bankruptcy costs associated with borrowing. High levels of debt has been found to reduce dividend payout of listed firms from the findings of this study and so firm managers should maintain debt in levels that do not impact negatively on dividend payout of listed firms to ensure the goal of maximizing shareholders’ wealth is attained.