Effect of Working Capital on the Dividend Pay-Out by Firms Listed at the Nairobi Securities Exchange, Kenya

Abstract

Managers strive to maximise shareholders wealth by making rational financing decisions regarding optimal working capital which would maximise the value of the firm. In an attempt to maximise the value of the firm managers employ sound management techniques to ensure that there is neither excess nor inadequate investment in current assets so as to strike a balance between liquidity and profitability. The determination of dividend payout is influenced by the working capital management of a firm but the extent to which working capital affects the dividend payout still remains a puzzle since most empirical studies conducted have reported inconsistent results. It is in this context that the study was set out to determine the effect of working capital on dividend payout of a firm. The objectives of the study were; to determine the effect of cash management, inventory management and account receivables on the firms’ dividend payout decisions. The study employed causal research design on a target population of 61 firms listed at the NSE. Purposive sampling was used to select 30 firms which consistently paid dividends from the year 20011 to 2015. Data was collected from the audited annual reports and financial statements of individual firms sourced from the NSE. Data analysis was done using descriptive and inferential statistics. Statistical hypothesis was tested using t-test at 5% margin of error. Normality of data, homoscedasticity and autocorrelation assumptions of the regression model were tested using descriptive statistics, scatter plots and Durbin Watson test. Multiple linear regression model was used to analyse the cause-effect relationship between independent variables and dependent variable. The overall model was found to be significant with F= 60.136, P value < 0.05. The study revealed that cash management with a P value < 0.05 has a positive effect on dividend payout. Inventory management with associated P value of 0.010 have a positive effect on dividend payout decisions. Account Receivables with a P value < 0.05 has a positive effect on dividend payout decisions. The study recommends that firms should ensure that cash is well managed, implement policies that ensure debtors pay on time, and inventory is well managed so as to increase the firms’ dividend payout. The results would provide information to managers to determine an optimal dividend payout that would maximise the company’s stock price and thus lead to maximisation of shareholders wealth.