Relationship between working capital management and dividend payout of manufacturing firms listed at the Nairobi Securities Exchange

Abstract

Corporate finance focuses on investment decisions, dividend decisions, financing and WCM decisions. The process of balancing firm working capital and dividend payments often determines how successful a business will be and this is dependent on how efficient a firm is in managing its disposable resources and its prudence in handling operational activities. Because of the drawbacks associate with an over or under investment in working capital, a number of research investigations have been made to find an optimal WCM policy. Such a level will permit companies to lower operational costs while benefitting from operational efficiencies. Because of this, WCM can be both a catalyst or limitation to dividend payout thereby adopting it as a study variable will be useful in determining optimal financial practices for managing liquidity. The objective of this research study was assessing how WCM impacts dividend payout of NSE listed manufacturing firms. The population for the research was all the 9 NSE listed manufacturing firms. Predictor variable in this research was WCM operationalized as current assets to current liabilities. Control variables were profitability given by return on equity, debt financing as given by total debt to total assets and firm size given by natural log of total assets on an annual basis. Dividend payout was the dependent variable given by ratio of dividend per share to earnings per share. Secondary data was collected over five years (January 2015 - December 2019) annually. Descriptive cross-sectional design was used for the research to assess the relation between the study variables. Analysis was made using SPSS version 24. Findings produced an R-square value of 0.214, meaning that 21.4 percent variations in dividend payout in firms in the manufacturing industry were the result of the four independent variables while 78.6 percent changes in dividend payout of NSE listed manufacturing firms was the result of other factors which are not highlighted. This research showed independent variables had a moderate association with firm’s values (R=0.462). ANOVA findings reveal the F statistic was substantial at 5% with p<0.05. This implies that the overall regression was appropriate to explain the influence of the independent variables on dividend payout. Findings also showed that debt financing has a substantial negative influence on dividend payout and firm size has a substantial positive impact on dividend payout of the NSE listed firms. WCM and profitability produced statistically insignificant influence for this study. The recommendation is that NSE listed manufacturing firms should focus on having a tradeoff between the tax shield benefits of debt financing and the risks of bankruptcy while at the same time enhancing firm size as these two have a significant influence on their dividend payout.