Dividend Policy, Agency Costs, Liquidity and Value of Firms Listed at the Nairobi Securities Exchange

Abstract

Firm value is an indispensable focus for every establishment since it depicts stockholders’ fortunes. Dividend policy is thought to be a key predictor of stockholders’ wealth. Payout-policy nonetheless, still remains a contested topic. The general objective of this study was to investigate the relationships among dividend policy, agency costs, liquidity and value of firms listed at the Nairobi Securities Exchange (NSE). The specific objectives were to; examine the effect of pay-out policy on corporate worth, evaluate the intervening effect of agency costs on the relationship between payout-policy and firm worth, determine the moderation effect of liquidity on the link between payout-policy and entity worth and determine the joint effect of dividend policy, agency costs and liquidity on company worth. Literature review brought out various knowledge gaps which included; varying results on the effect of pay-out policy on firm value, contextual differences, fewer studies conducted on the joint effect of payout-policy, agency costs and liquidity on corporate value, limited studies testing the mediating and moderating effect of agency costs and liquidity respectively in the link between payout-policy and corporate worth and varying measurements of the constructs. In order to address the aforementioned gaps, four hypothetical statements were drawn up and a positivistic philosophical approach adopted. A descriptive research design using panel data was espoused. Balanced secondary data for 52 firms was obtained from the NSE. The dataset was run through descriptive statistics analysis, diagnostic and specification tests, correlation analysis and finally to inferential statistics analysis. The four hypotheses were tested using the general least squares (GLS) fixed-effect model. Baron and Kenny (1986) model was used to test for mediation and moderation effects of agency costs and liquidity respectively. The study reported that payout-policy predicts corporate value. The connection between pay-out policy and corporate worth is mediated by agency costs. Liquidity was also shown to moderate the interrelationship between pay-out policy and corporate worth. Payout-policy, agency costs and liquidity jointly explained 85% variations in corporate worth. This study recommends that insiders should craft payout policies that grow fortunes by taking quantum and frequency of pay-outs into account. Agency costs and liquidity should further be considered in explaining the connection between pay-out policy and wealth. This study specifically validates agency theory by reporting that dividend pay-out implies that the stocks are valuable and also cuts liquidity that can be overinvested. Consequently, payment curtails agency costs and grows wealth. This study also provides invaluable knowledge to NSE and Capital Markets Authority (CMA) specifically on investor training initiatives and policy formulation. Agency costs and liquidity are proven to be alternative criterion for assessing entities to be put under liquidation which is key information for CMA. The limitations of this study included; the study relied on regression modelling that omitted non-financial factors, the study was restricted to the NSE, making generalization of the finding problematic and difficulty in incorporating mode of dividend pay-out since majority of entities made cash pay-outs at the NSE