Capital Structure and Dividend Payout Ratio of Non-financial Companies Listed at the Nairobi Securities Exchange

Abstract

This study investigates the effect of capital structure on dividend payout ratio among non-financial firms listed at the Nairobi Securities Exchange (NSE). In particular, the study sought to determine the effect of leverage, profitability and liquidity on dividend payout ratio. Modigliani and Miller’s (1958) theory of dividend irrelevance, Pecking Order Theory (Myers, 1984), Trade Off Theory (Brealey and Myers, 2003), and Agency Theory (Jensen and Meckling, 1976) guided the study. The study was conducted based on a sample of 45 non financial firms listed on the Nairobi Securities Exchange during the period 2013-2017 using panel data estimation technique. Descriptive research design was used on secondary data from the audited financial reports of 45 non-financial firms listed at the NSE was employed by the study. The study conducted a census of all the non-financial firms listed at the NSE. Data collection sheets were used as tools to gather the data and prepare it for data analysis. The data analysis was performed by use of SPSS then presented using tables. From the data analysis, the coefficient of determination was 0.705. This implies that the predictor variables could explain 70.5% of the adopted study model. Profitability regression coefficient was +39.28. Liquidity had a negative coefficient of 1.650, while leverage also had a negative coefficient of 2.529. The p-values for leverage (p=0.001); profitability (p=0.032) and liquidity (p=0.024) which were <0.05 imply that the three variables were statistically significant at five percent significance level. The study concludes that dividend payout ratio decreases with unit increment in leverage and liquidity. However, with increase in profitability, there is increase in dividend payout ratio. The study therefore recommends adequate measures to be put into place to improve and grow the profitability of the firms. Profitability growth can be achieved through efficiency measurement of the non-financial firms. It is recommended that a study be done on the effect of capital structure on dividend yield among non-financial firms listed at the NSE. Similarly, a shorter time period should also be given consideration. A study is recommended on the effect of capital structure on dividend payout using a panel data for a three year period among non financial firms listed at the NSE.