Determinants of Dividend Payout Ratios in Kenya

Abstract

Dividend policy is one of the most important and controversial corporate finance decisions. It is important because it is a repetitive decision that involves large amounts of cash outflow and closely related to most capital structure and budgeting decisions the firm makes. It is controversial because despite the extensive research conducted so far, there remain conflicts as to why firms pay dividends and why investors pay attention to dividends. This paper examines the effect of six factors shown to influence dividend policies in companies operating in developed countries on companies operating in Kenya, a developing economy using a Tobit Regression model. It is observed that dividend payout ratio is impacted negatively by the growth rate, debt ratios and firm size and positively by earnings, market-to-book ratio and retained earnings to total assets ratio. The results of this study are beneficial to investors with regard to their investment portfolio management and financial managers with regard to developing dividend policies that maximise shareholders’ wealth. The study also adds more empirical evidences to existing dividend policy literature in Kenya and provides additional evidence internationally regarding payout policies.

Keywords: Dividends, Payout ratio, Kenya