The relationship between capital structure and dividend pay out ratio of firms listed at the Nairobi securities exchange

Abstract

The dividend pay-out policy is one of the most debated topics within corporate finance and some academics have called the company’s dividend pay-out 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 pay-out ratios? The purpose of the study is to determine if there is a relationship between a number companies selected factors and the companies’ dividend pay-out 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 pay-out ratios. Based on the literature, the study tested the relationship between capital structure and dividend pay-out 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 pay-out 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 pay-out ratios and there are some differences between the companies. The large companies have higher dividend pay-out ratios than smaller companies. There was also a negative significant between capital structure and dividend pay-out ratio.