Determination of Optimum Dividend Policy: Empirical Evidence from Listed Firms at the Nairobi Securities Exchange (NSE) 2000- 2010

  • Dennis Bulla Department of Accounting and Finance, Masinde Muliro University of Science and Technology, P. 0 Box 190, 50100 Kakamega, Kenya.
Keywords: Optimum Policy, Dividends, Earnings, Nairobi Securities Exchange

Abstract

Dividend decisions remain to be one of the most controversial subjects in corporate finance since the debate on its relevance was started by Lintner in the 1950s. Facts show that, while companies would prefer to pay dividends, they are more concerned with stability and growth of payout. Consequently, this study applied a simple linear regression model to determine stability of dividends for listed firms at the Nairobi Stock Exchange. The parameters estimated are adjustment rate and target payout ratio. Study objectives are: i) to determine the target dividend rate and adjustment rate for the market based on empirical data of listed companies for the period 2000-2010. ii) To determine the relationship between earnings and dividend policy of listed firms at the exchange. Empirical data of 40 listed companies at the Nairobi Securities Exchange was collected and analyzed statistically using a simple regression model (OLS) at the 5% level of significance for the period. Results of analysis from the empirical panel data indicate that overall, listed companies within the period had an average target payout rate of 3.5% of the changes in current earnings and an adjustment rate of 52%. The relationship between current earnings and dividend payout was positive and fairly strong (0.65) and was also statistically significant. Therefore data did not sufficiently justify dividend smoothing at the NSE. Optimum dividend policy for listed firms at the NSE is therefore determined by low target rate and moderately high adjustment rate. Consequently dividend payout is low and fairly unstable creating some uncertainty. Current earnings explained 42% of the variation in dividend payment from the sampled data.

References

Ahmed, H.,&Javid, A.(2009). T he Determinants of Dividend Policy in Pakistan, International Research Journal Of Finance and Economics, 29, 110-125.

Aivazian , V. L. Booth, & S. Cleary, 2003, Do emerging market firms follow different dividend policies from U.S. firms?, The Journal of Financial Research 26, 371-3 87.

Al-Malkawi, H.N. (2007). Determinants of corporate dividend policy in Jordan: An Application of the T obit Model. Journal of Applied Accounting Research, 23, 44-70.

Baker, M & Jeffrey,W.(2004).A catering theory of dividends. Journal of Finance, 59, 1125-1165.

Bhattacharya, S.(1980).Imperfect Information, Dividends Policy, and the "Bird-in-the-Hand" Fallacy. Journal of Economics, 10, 259-270.

Brav, A; Graham, J.; Harvey,C & Michaely.R. (2005). Payout Policy in the 21st Century. Journal of Financial Economics, 77, 483– 527.

Dhanani, A. (2005). Corporate dividend policy: The views of British financial managers. Journal of Business Finance & Accounting, 37(7) & (8), 1625 – 1672.

Fama, E., & Babiak, H.(1968). Dividend Policy: An Empirical Analysis. Journal of the American Statistical Association, 63,1132–1161.

Fama,E.& French.R.(2001). Disappearing dividends: Changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60, 3-43.

Gordon, M.J. & Shapiro, E.(1956). Capital equipment analysis: the required rate of pro fit. Journal of Management Science, 3, 102-110.

Habib, Y; Kiani,Z; Irshad, I & Khan, M.A (2012). Dividend Policy and Share Price Volatility: Evidence from Pakistan. Global Journal of Management and Business Research, 12 (5).

Jensen, M. C., & Meckling. W.H.(1976). Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics, 3, 305–360.

Kyle, P & Frank, B.(2013).Dividend policy And Stock Price Volatility in the US Equity capital Market. ASBBS Annual Conference,
Las Vegas. 20 (1).

Lease, R.C.; John, K.; Kalay, A.; Loewenstein, U & Sarig, O.D.,(2000). Dividend Policy: its Impact on Firm Value, Harvard Business School Press, Boston, MA.

Lintner, J.(1956).Distribution of Incomes of Corporations among Dividends, Retained Earnings, and T axes. American Economic Review, 46(2), 97–113.

Michaely, R. & Roberts,M.R. (2012) Corporate Dividend Policies: Lessons from Private firms. Available from www.oxfordjournals.org.

Michaely,R.; Thaler,R.H. & Womack,K.(1995).Shareholder Heterogeneity, Adverse Selection, and Payout Policy. Journal of Finance, 50, 573–608.

Miller, M. & Scholes, M.(1978). Dividends and taxes, Journal of Financial Economics,6 (4), 333-364.

Miller, M. & Modigliani, F.(1961).Dividend Policy, Growth and the Valuation of Shares. Journal of Business 34, 411–433.

Stulz, R. M. (2000). Merton Miller and modern finance. Financial Management, 29(4), 119–131.

Wolmoran, H.P. (2003). Does Lintner Dividend Model Explain South African Dividend Payments? Meditari Accountancy Research, 11, 243-254
Published
2018-08-27
How to Cite
Bulla, D. (2018, August 27). Determination of Optimum Dividend Policy: Empirical Evidence from Listed Firms at the Nairobi Securities Exchange (NSE) 2000- 2010. African Journal of Education,Science and Technology, 1(2), pp 60-66. https://doi.org/https://doi.org/10.2022/ajest.v1i2.161
Section
Articles