The Effect of Earnings on Dividend Policy of Cyclical Firms Listed at the Nairobi Securities Exchange
Abstract
One of the central issues in corporate finance has been the dividend decision of a firm, which
has always been studied in relation to a firm’s financing and investment decisions. Many
studies have been done in an attempt to provide answers to the many questions arising from
dividend policy but mystery still surrounds the dividend decision. Earnings are one of the key
determinants of dividend policy of firms since they determine the level of payout and whether
to pay or not. When earnings swing due to economic downturn, this turbulence is felt in
dividend policy, hence economic cycles cannot be divorced from the dividend decisions of
firms. It therefore becomes more difficult when earnings are not stable; hence managers are
in a dilemma on how to handle dividend policy in cyclical conditions. The objective of this
study was to find out the effect of earnings on dividend policy of cyclical firms listed at the
NSE. The study employed cross-sectional research design with a quantitative research
approach to give accurate results. Regression analysis was used to analyse the relationship the
Dividend payout ratio and earnings. Sales growth, Liquidity and leverage were taken as
control variables. To test for possible auto correlation, Durbin Watson t- test was used. From
the correlation result of the study, Earnings and Sales growth strongly influence dividend
payout of cyclical firms; Leverage influences payout to a moderate extent whereas Liquidity
has an insignificant influence on payout of cyclical firms. Regression result of the study
identifies Earnings, Sales growth, Liquidity and Leverage as critical factors influencing
dividend payout of cyclical firms. Therefore this study finds earnings cycles as a critical
factor that influences dividends, hence it recommends that firms should continuously manage
their accounting practices to ensure that earnings variables i.e. sales growth, liquidity and
leverage are properly handled to improve the payout of cyclical firms, since the results show
that they critically influence dividend payout.
Citation
Master Of Science In Finance, School Of Business, University Of Nairobi,2014Publisher
University of Nairobi