Dynamics of Dividend Payout in Emerging Stock Markets: Evidence from Public Firms at Nairobi Securities Exchange, Kenya

Abstract

Dividend decisions are central to corporate finance because of its relationship with firm value, finance and investment. Emerging stock markets like the Nairobi Securities Exchange have been hypothesized to exhibit unpredictable dividend behavior by some finance scholars. The thesis is guided by the hypothesis that emerging market firms following dividend pattern different from that of developed stock markets and that determinants of payout exhibit different behavior in different stock exchanges. A mixed design involving panel data from 40 firms over the period 2000 to 2010 and cross section data from finance officers of 40 firms provide evidence of dividend dynamics for quoted companies at the exchange. Panel data estimation techniques along with logistic regression are applied in analysis and testing of hypotheses at 0.05 level based on firm and industry characteristics. Conclusions include; dividends payout by listed firms at the NSE are influenced and predicted mainly by prior dividends (73%) followed by changes in current after tax earnings (3.5%) and lastly business risk to a lesser extent. Secondly, three companies consistently paid significantly higher dividends than their peers in the study period. Thirdly, majority of corporate managers do not smooth dividends when distributing earnings. Forth, Fama and Babiak (1968) dividend model best explains dividend behaviour of NSE firms compared to Lintner (1956) model. Fifth dividend payout in this market is explained by agency cost, signaling and information asymmetry theories. Lastly industry and time effects have no link to dividend decisions of firms in the market. Recommendations include; Shareholders and new investors at NSE should consider prior dividends and earnings changes when making choices about which stock(s) to buy. Dividend payout need to be stabilized by corporate managers to enhance value especially by firms in sectors facing high risk and growth prospects. More so dividend paying firms are preferred by investors to non-paying firms and that changes in dividends elicit excitement among investors compared to keeping dividend unchanged. Finally management of three firms namely Bamburi Cement, Kapchorua Tea and BOC Ltd possess superior talent compared to other firms in their respective industries.