Corporate governance and dividend policy in Kenya : A survey of companies listed at the Nairobi stock exchange

Abstract

Corporate governance exists to provide checks and balances between shareholders and management and thus to mitigate agency problems. Hence, firms with better governance quality should incur less agency conflicts, and managers should be less likely to adopt a sub-optimal dividend policy. As a result, the quality of corporate governance should have an impact on dividend policy. There has been renewed interest in the corporate governance practices of modern corporations, particularly due to the high-profile collapses of a number of large U.S. firms. There is evidence in the finance literature that tends to support the hypothesis that the patterns of corporate dividend payout policies vary tremendously between developed and transition markets. In developing countries, little studies have been done to establish the correlation between corporate governance and dividend policy. For these reasons, a study on this relationship between dividend policy and corporate governance in a transition economy offers an interesting subject and complements the existing corporate governance literature. The fundamental premise of this study is that there ought to be an economic association between corporate governance quality and dividend payouts. This study provides empirical evidence on the association between aggregate governance quality and dividend payouts. Review of the literature provides a theoretical framework on corporate governance and dividend policy. To test whether corporate governance practices determine the dividend policy in the companies listed in the Nairobi Stock Exchange, we compose quantitative measures on the quality of the corporate governance for these companies. The regression research design methodology was used to assess the relationship level between corporate governance standards and dividend policy. The study sampled 38 companies listed in the Nairobi Stock Exchange (NSE), and used secondary data obtained from financial reports, and companies’ annual reports. The data obtained were qualitatively analyzed to establish the level at which the company Transparency Disclosure Index (TDI) affects dividend payouts. These were summarized in form of research findings, recommendations, conclusions and suggestions of areas for further research. The findings demonstrate that an increase in the TDI, representing corporate governance practices, brings about a statistically significant increase in the dividend payout ratios.