DETERMINANTS OF DIVIDEND PAYOUT FOR COMPANIES LISTED AT THE NAIROBI SECURITIES EXCHANGE BY ONGERI GILBERT ARUMBA D63/82934/2012 A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OFTHE DEGREE OF MASTER OF SCIENCE IN FINANCE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI. OCTOBER 2014 DECLARATION This research project is my original work and has not been presented at any university or institute of higher learning for examination or academic purposes. Information from other sources has been duly acknowledged. Signature........................................... Date................................... Ongeri Gilbert Arumba - S/No. D63/82934/2012 Student This research project has been submitted for examination with my approval as the University of Nairobi supervisor. Signature........................................... Date................................... Dr. J. Aduda Dean School of Business ii ACKNOWLEDGEMENT I thank the Almighty God for giving me good health, the opportunity and the strength to pursue the Msc course and finalization of this paper. This is a great blessing indeed. I would like to acknowledge the invaluable support of my supervisor Dr. J. Aduda for his encouragement, critique, suggestions and dedicated guidance all through this research project. My sincere gratitude to Mr. Mirie Mwangi who took his time to moderate my research proposal and all my lecturers through whom I gained the necessary knowledge that indeed facilitated writing of this research project. Special thanks go to my wife Carolyne and daughters Nellwyn and Natalie for their economic, moral and social support. I highly appreciate the effort and the many sacrifices made by my parents Peterson and Norah to ensure I got the best education that they could secure with their little resources. Further, I could like to acknowledge the support I received from my boss Edith Nkanata (Mrs.) and her understanding during the many times I was not on duty pursuing this research project. Without her support and that of my work colleagues who assisted in discharging my duties during my absence, I couldn’t have finished this research project in time. I also wish to thank my class mates for their support and critique without which this paper couldn’t have been complete. Finally, I thank my friends for their understanding during the many times I was not there for them. Thank you all and God bless you. iii DEDICATION Dedicated to my parents Peterson and Norah for facilitating my childhood education without which I couldn’t have made it this far. iv ABSTRACT This paper sought to establish the determinants of dividend payout for companies listed at Nairobi Securities Exchange (NSE). The objective of the study was to establish how and the extent to which company earnings, liquidity, profitability, and company size determine dividend payout for firms listed at the NSE. The study relied on secondary data which was analysed using SPSS software version 20 and the results presented in tables. The results consistently support the potential association between the four independent variables and the dependent variable (dividend payout) for firms listed at the NSE. Earnings, profitability and company size had a positive correlation with dividend payout while liquidity had a negative correlation with dividend payout. At 5% level of significance, earnings, liquidity and profitability were found to be statistically significant while company size was not significant. The study used the F- statistic to test the overall significance of the regression model and the model was found statistically significant and suitable for this study. The model had an R2 of 0.7769 implying that variations in the four independent variables accounted for 77.7% of variations in the dependent variable which was further proof thatthe model was statistically significant and suitable for the study since it explained nearly all the variability of the dependent variable. It is against this backdrop that this research study arrived at conclusions including that profitability had the greatest influence on dividend payout for firms listed at the NSE and recommended among others, that companies listed at the NSE observe and manage well their policies dealing with the four independent variables. Finally, the study made various recommendations among them, further similar research using multiple economic factors. This will enable a thorough research as it gives a wholesome approach to establishing determinants of dividend payout for firms listed at the NSE. v TABLE OF CONTENTS DECLARATION ...........................................................................................................ii ACKNOWLEDGEMENT ........................................................................................... iii DEDICATION..............................................................................................................iv ABSTRACT...................................................................................................................v TABLE OF CONTENTS..............................................................................................vi LIST OF TABLES..................................................................................................... viii CHAPTER ONE: INTRODUCTION............................................................................1 1.1 Background to the Study......................................................................................1 1.1.1 Determinants of Dividend Payout .................................................................2 1.1.2 Dividend Payout ............................................................................................4 1.1.3 Relationship between Determinants and Dividend Payout ...........................6 1.1.4 Nairobi Securities Exchange .........................................................................8 1.2 ResearchProblem..................................................................................................9 1.3 Objectives of the Study ......................................................................................11 1.3.1 Main Objective ............................................................................................11 1.3.2 Specific Objectives ......................................................................................11 1.4 Value of the Study..............................................................................................11 CHAPTER TWO: LITERATURE REVIEW..............................................................13 2.1 Introduction ........................................................................................................13 2.2 Review of Dividend Theories ............................................................................13 2.2.1 Dividend Irrelevance Theory.......................................................................14 2.2.2 Dividend Preference or Bird-In-Hand Theory.............................................15 2.2.3 Tax Differential Theory...............................................................................15 2.2.4 Clientele Effect Theory ...............................................................................16 2.2.5 Information Content or Signaling Effect Theory ........................................17 2.2.6 Agency Theory ............................................................................................18 2.3 Dividend Policies ...............................................................................................20 2.3.1 Residual Policy............................................................................................20 vi 2.3.2 Constant Pay-out Policy ..............................................................................21 2.3.3 Stable or Predictable Policy.........................................................................21 2.3.4 Low Regular Plus Extra Policy ...................................................................21 2.4 Review of Empirical Studies..............................................................................22 2.5 Chapter Summary...............................................................................................26 CHAPTER THREE: RESEARCH METHODOLOGY ..............................................28 3.1 Introduction ........................................................................................................28 3.2 Research Design.................................................................................................28 3.3 Population...........................................................................................................28 3.4 Sample Size........................................................................................................29 3.5 Data Collection...................................................................................................29 3.6 Data Analysis .....................................................................................................29 CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION OF FINDINGS ...32 4.1 Introduction ........................................................................................................32 4.2 Descriptive Statistics..........................................................................................32 4.3 Regression Analysis ...........................................................................................33 4.4 Summary and Interpretation of Findings ...........................................................36