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The Effect of Profitability on Dividend Policy Of THE EFFECT OF PROFITABILITY ON DIVIDEND POLICY OF COMMERCIAL BANKS IN KENYA ELIZABETH WARWARE MIGWI A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI NOVEMBER, 2015 DECLARATION This research project is my original work and has not been submitted for examination in any other university. ……………………………………. ……………………………. Signature Date Elizabeth Warware Migwi Reg. No D61/65363/2013 Supervisor This research project has been submitted with my approval for examination to the university, as a university supervisor …………………………………… …………………………… Signature Date Dr. Mirie Mwangi Senior Lecturer, Department of Finance and Accounting University of Nairobi ii ACKNOWLEDGEMENT I am deeply obliged to my supervisor Dr. Mirie Mwangi for his exemplary guidance and support whose help made this research project a success. I thank him for his patience and time during the whole interaction. I wish you God‟s blessings as you continue to make a contribution in the advancement of knowledge in this field. I acknowledge my colleagues for their unwavering support encouragement and understanding and availing time to listen to me when I sought their assistance. I appreciate the department of finance and accounting staff who were always willing to accord me attention whenever necessary. To the University of Nairobi library personnel, I highly appreciate your tireless effort to ensure that the students access the required learning materials at the right time. May the almighty God bless you in your endeavors to assist learners‟ to access information. I take this opportunity to express my deep gratitude to my loving children for their love and moral support and motivation without whom this undertaking would have been a big challenge. My deep appreciation to my parents for setting my feet in the path to success and instilling in me the values that have seen me stand. I sincerely thank the Almighty God for his guidance and giving me the ability and strength to move on despite the challenges as I undertook the research. iii DEDICATION This research project is dedicated to my family for their support and inspiration during my studies that enabled me to complete this research project. I will always value and esteem you highly. iv TABLE OF CONTENTS DECLARATION ............................................................................................................................ ii ACKNOWLEDGEMENT ............................................................................................................. iii DEDICATION ............................................................................................................................... iv LIST OF ABBREVIATIONS ........................................................................................................ ix CHAPTER ONE ........................................................................................................................... 1 INTRODUCTION ........................................................................................................................ 1 1.1 Background of the Study .......................................................................................................... 1 1.1.1 Profitability......................................................................................................................... 2 1.1.2 Dividend Policy .................................................................................................................. 4 1.1.3 Profitability and Dividend Policy ....................................................................................... 7 1.1.4 Commercial Banks in Kenya.............................................................................................. 8 1.2 Research Problem ..................................................................................................................... 9 1.3 Research Objective ................................................................................................................. 11 1.4 Value of the Study .................................................................................................................. 12 CHAPTER TWO ........................................................................................................................ 13 LITERATURE REVIEW .......................................................................................................... 13 2.1 Introduction ............................................................................................................................. 13 2.2 Theoretical Review ................................................................................................................. 13 2.2.1 The Miller and Modigliani Dividend Irrelevance Theory ................................................ 13 2.2.2. Monetarist Theory of Inflation ........................................................................................... 14 2.2.3 The Bird-in-the-Hand Hypothesis .................................................................................... 15 2.2.4 The Tax Preference Hypothesis ....................................................................................... 16 2.2.5 Clientele Effect Hypothesis .............................................................................................. 17 2.2.6 Liquidity Preference ............................................................................................................ 19 v 2.3 Determinants of Dividend Policy of Firms ............................................................................. 22 2.3.2 Liquidity ........................................................................................................................... 23 2.3.3 Inflation ............................................................................................................................ 24 2.3.4 Need for Additional Capital ............................................................................................. 24 2.3.5 Taxation Policy ................................................................................................................ 25 2.3.6 Leverage ........................................................................................................................... 26 2.4 Empirical Studies .................................................................................................................... 26 2.4.1 Global Studies .................................................................................................................. 26 2.4.2 Local Studies .................................................................................................................... 29 2.5 Summary of Literature Review ............................................................................................... 32 CHAPTER THREE .................................................................................................................... 34 RESEARCH METHODOLOGY .............................................................................................. 34 3.1. Introduction ............................................................................................................................ 34 3.2. Research Design .................................................................................................................... 34 3.3. Population .............................................................................................................................. 35 3.4 Data Collection ....................................................................................................................... 35 3.5 Data Analysis .......................................................................................................................... 35 3.5.1Analytical Model ............................................................................................................... 35 3.5.2 Test of Significance .......................................................................................................... 37 CHAPTER FOUR ....................................................................................................................... 39 DATA ANALYSIS, RESULTS AND DISCUSSION............................................................... 39 4.1 Introduction ......................................................................................................................... 39 4.2 Response Rate ..................................................................................................................... 39 4.3 Data Validity ....................................................................................................................... 40 4.4 Descriptive Statistics ........................................................................................................... 40 vi 4.5 Results of Correlation Analysis........................................................................................... 42 4.6 Regression Analysis ............................................................................................................ 43 4.6.1 Analysis of Variance (ANOVA) .................................................................................. 44 4.6.2 Regression Coefficients ................................................................................................ 45 4.7 Discussion of Research Findings .......................................................................................
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