Effect of Financial Crisis on Dividend Payout Policy of Commercial and Services Firms Listed at the Nairobi Securities Exchange

Abstract

The study sought to establish the effect of a financial crisis on the dividend payout policy of commercial and service firms listed at Nairobi Securities Exchange. The independent variables for the study were real GDP, inflation, profitability, liquidity and leverage. The study employed descriptive research design. Research data was obtained from Nairobi Securities Exchange (NSE) annual reports of commercial and service firms’ financial statements and Kenya National Bureau of Statistics. The results were analyzed using Stata software. The study used annual data financial reports for 8 commercial and service firms listed at Nairobi Securities Exchange since the years 2007-2015. From the results of correlation analysis, there is a positive and statistically significant correlation between real GDP and dividend payout ratio. The study also found out that there is a negative and significant correlation between inflation and dividend payout ratio. Profitability was also found to have a positive and significant association with dividend payout ratio of commercial and service firms listed at Nairobi Securities Exchange. Liquidity was found to have a strong positive and significant association with dividend payout ratio. Finally, leverage had a negative and significant association with dividend payout ratio. The model summary revealed that the independent variables: real GDP, inflation, profitability, liquidity and leverage explains 91.4% of changes in the dependent variable which is dividend payout ratio. Regression results showed that real GDP had a positive and statistically significant relationship with dividend payout policy of commercial and service firms listed at Nairobi Securities Exchange, inflation has negative and statistically significant relationship with dividend payout policy of commercial and service firms while profitability has a positive and statistically significant relationship with dividend payout policy of commercial and service firms listed at Nairobi Securities Exchange. Further, regression results showed that liquidity has positive and statistically significant relationship with dividend payout policy of commercial and service firms. Finally, regression results showed that leverage has a negative and statistically significant relationship with dividend payout policy of commercial and service firms listed at Nairobi Securities Exchange. From the study findings, the study conclude that dividend payout policy of Commercial and Service firms is significantly affected by level of real GDP, inflation rate, profitability, liquidity and leverage. This study recommends growth of real GDP for favorable business environment. This study further recommends formulation of macroeconomic policies to curb inflation and maintained it at the recommended and favorable level. It is also recommended that proactive fiscal policy and prudent monetary policy should be enacted to reduce firms’ leverage through such measures as promoting mergers and acquisitions, revitalizing stock assets, optimizing debt structure, carrying out debt-for-equity swap programs and developing equity financing.