The purpose of this study was to investigate the effect of dividend policy on capital budgeting decision in manufacturing companies listed in Nairobi stock exchange. Explaining why companies pay dividend and some do not pay dividends is still problematic to explain and therefore dividend decision remains controversial. The research design to be employed in this study was descriptive research design inform of a survey. The population of interest of this study comprised of 9 manufacturing companies listed at the Nairobi Securities Exchange (NSE, 2015). Purposive sampling was used to select five respondents in the finance department from each company, thus a sample of 45 respondents. The study collected both secondary and primary data. The study sourced secondary data from the audited financial statements at the companies and internet given all these sources has the data available for this study.  A questionnaire was used to collect primary data for this study. The pilot study was conducted and this involved pretesting of the data collection instruments. Content analysis and descriptive analysis was employed. Tables and other graphical presentations as appropriate were used to present the data collected for ease of understanding and analysis. Inferential statistics regressions were done to establish effect of dividend policy on capital budgeting decision in manufacturing companies listed in Nairobi Stock Exchange. The study established that investment opportunities do affect capital budgeting decision among manufacturing companies to a great extent and that investment opportunities available to the firm constitute an important component of market value. Thus the study concludes that manufacturing companies that have high investment opportunity set have pursued a low dividend payout policy and hence adopted efficient capital decision techniques. The study revealed that firms with high financial leverage and implied financial risk tend to avoid paying high dividends. The study thus concludes that manufacturing companies with high financial leverage have been more profitable, compared to those their counterparts with a low financial leverage, since they can accommodate risk associated with the use of debt finance. The study found that profitability of a firm does affect capital budgeting decision among manufacturing companies to a great extent. The study draws conclusion that profitable firms have ensured that they maintain their current earnings as high as possible since the ratio dividend payout depends on the current earnings of the firm. The study draws further conclusions that profits making manufacturing firms have more growing opportunities since such firms end up retaining a greater portion of their earnings to finance their expansion projects as against returning these dividends to shareholders.

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