EFFECT OF DIVIDEND POLICY ON CAPITAL BUDGETING DECISION IN MANUFACTURING COMPANIES LISTED IN NAIROBI STOCK EXCHANGE
Abstract
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.
Full Text:
PDFReferences
Abbott, L. J. (2011). “Financing, dividend and compensation policies subsequent to a shift in the investment opportunity set”, Managerial Finance, Vol. 27 No.3, pp.31-47.
Adjaoud, F., & Ben-Amar, W. (2007). Corporate Governance and Dividend Policy: Shareholders‟ Protection or Expropriation? Journal of Business Finance & Accounting, Vol-37 No.5, pp.648–667.
Ahmed, H., & Javid, A. Y. (2009). “Determinants of Dividend Policy in Pakistan”, International Research Journal of Finance and Economics, Issue 29, pp. 110- 125.
Aivazian, V., Booth, L., & Cleary, S. (2003). Do emerging market firms follow different dividend policies from U.S. firms? Journal of Financial Research, Vol. 26 No. 3, pp. 371-387.
Aivazian, V., Booth, L., & Cleary, S. (2006). “Dividend smoothing and debt ratings”, Journal of Financial and Quantitative Analysis, Vol.41, pp.439-453.
Aivazian, V., & Booth, L. (2013). "Do emerging market firms follow different dividend policies from US firms?", Journal of Financial Research, Vol. XXVI No.3, pp.371-87.
Al-Ajmi, J., & Hussain, H. (2011). Corporate dividends decisions: evidence from Saudi Arabia‟, The Journal of Risk Finance, Vol. 12 No. 1, pp. 41-56.
Al-Kuwari, D., (2009). Determinants of the Dividend Policy in Emerging Stock Exchanges: The Case of GCC Countries‟, Global Economy & Finance Journal, Vol. 2 No. 2 September, pp. 38-63.
Allen, F., Antonio, E. B., & Ivo, W. (2000). A Theory of Dividends Based on Tax Clienteles‟, Journal of Finance, Vol. 55, pp.2499-2536.
Alli, K. L., Khan, A. Q., & Ramirez, G. G. (1993). Determinants of Corporate Dividend Policy: A factorial Analysis”, The Financial Review Vol. 28, pp. 523-547.
Al-Malkawi, H. N. (2007). Determinant of Corporate Dividend Policy in Jordan‟, Journal of Economic and Administrative Science, Vol-23, pp. 44-71.
Al-Najjar, B., & Hussainey, K. (2009). The Association between Dividend Payout and Outside Directorships‟, Journal of Applied Accounting Research, pp. 1-28.
Al-Twaijry, A. (2007). Dividend policy and payout ratio: evidence from the Kuala Lumpur stock exchange‟, The Journal of Risk Finance, Vol. 8 No. 4, pp. 349-363.
Al-Yahyaee, K. (2006). Capital Structure and Dividend Policy in a Personal Tax Free Environment: The Case of Oman‟, PhD Thesis, University of New South Wales.
Amidu, M., & Abor, J. (2006). Determinants of Dividend Payout Ratios in Ghana‟, The Journal of Risk Finance, Vol-7 (2), pp.136-145.
Anderson, D. R., Sweeney, D. J., & Williams, T. A. (2008). Statistics for business and economics, Thomson South-Western.
Anderson, G. J. (2013). "The internal financing decisions of the industrial and commercial sector: a reappraisal of the lintner model of dividend disbursements", Economica, Vol. 54 pp.235-48.
Anil, K., & Kapoor, S. (2008). ‟Determinants of dividend payout ratios a study of Indian information technology sector‟, International Research Journal Finance and Economics, Vol-15, pp. 1-9.
Arnold, G. (2008). Corporate financial management. London: Financial Times Pitman Publishing.
Baker, H. K, (1999). Dividend policy issues in regulated and unregulated firms: a managerial perspective‟, Managerial Finance, Vol. 25 No. 6, pp. 1-19.
Baker, H., Powell, G., & Veit, E. (2002). ‘Revisiting Managerial Perspectives on Dividend Policy‟, Journal Of Economics And Finance ,Vol.26 No 3, Fall,pp.267-283.
Bell, L., & Jenkinson, T. (2002). "New evidence of the impact of dividend taxation and on the identity of the marginal investor", Journal of Finance, Vol. 57 No. 3, pp. 1321-1346.
Bennouna, K., Meredith, G.G., & Marchant, T. (2010). “Improved capital budgeting decision making: evidence from Canada”, Management Decision, Vol. 48, No. 2, pp. 225-247.
Black, F., (1976). The Dividend Puzzle, Journal of Portfolio Management 2, 5-8
Bhattacharyya S,Morrill B(2008). The Temporal Structure of Equity Compensation. Working Paper, University of Michigan
Bhattarcharya, S. (1979). Imperfect Information, Dividend Policy, and the Bird in Hand Fallacy. The Bell Journal of Economics, 10 (1), 259-270.
Brav, A., Graham, J. R., Harvey, C. R., & Michaely, R. (2005). Payout policy in the 21st century. Journal of Financial Economics, 77(3), 483-527
Bitok, K., Tenai, J., Cheruiyot, T., Maru, L., & Kipsat, M. (2010). The level of corporate dividend payout to stockholders: Does optimal dividend policy exist for firms quoted at the Nairobi Stock Exchange? International Business & Economic Research Journal, 9(3), 71-84.
Chen, J., & Dhiensiri, N. (2009). Determinants of Dividend Policy: The Evidence from New Zealand‟, International Research Journal of Finance and Economics, Issue 34, pp. 18-28.
Chigazie, O. G. (2010). A Diagnosis of the Determinant of Dividend Pay-Out Policy in Nigeria: A Factor Analytical Approach‟, American Journal of Scientific Research, Issue 8(2010), pp.57-67
Chung, K., & Charoenwong, C. (2009). "Investment options, assets in place, and the risk of stocks", Financial Management, Vol. 20 pp.21-33.
Dempsey, S.J., Laber, G., & Rozeff, M.S. (1993). Dividend policies in practice: is there an industry effect? Quarterly Journal of Business and Economics, 32(4), 3-13
Easterbrook, F. (2004). "Two agency-cost explanation of dividends", American Economic Review, Vol. 74 pp.650-9.
Farinha, J. (2013). "Dividend policy, corporate governance and the managerial entrenchment hypothesis: an empirical analysis", Journal of Business Finance & Accounting, Vol. 30 No.9-10, pp.1173-209
Fowdar, S., Subadar, U. A., Lamport, M., Sannassee, R. V., & Boodhoo, S. (2007). Motivators of Dividend Payout among Firms listed on the Stock Exchange of Mauritius‟, UoM Research Journal ,Vol.13A , pp.103-116.
Farrelly, G. F., Gail, E. H., Kent, B., & Richard, B. E. (1995). “Corporate Dividends: Views of Policy Makers,” Business and Economic Review, 17:4 (Winter), pp.62-74
Gordon, M. J. (1963) Optimal Investment and Financing Policy, Journal of Finance 18, 264-272.
Gaver, J. J., & Gaver, K. M. (2013). "Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies", Journal of Accounting and Economics, Vol. 16 No.1-3, pp.125-40
Green, P., Poque, M., & Watson, L. (2013). "Dividend policy and its relationship to investment and financing policies, empirical evidence using Irish data", Irish Business and Administrative Research, Vol. 14 No.2, pp.69-83
Gul, F. A., & Kealey, B. T. (2009). "Chaebol, investment opportunity set and corporate debt and dividend policies of Korean companies", Review of Quantitative Finance and Accounting, Vol. 13 pp.401-16
Higgins, R. C. (2011). "Sustainable growth under inflation", Financial Management, Vol. 10 pp.36-40
Higgins, R. C. (2012). "The corporate dividend-savings decision", Journal of Financial and Quantitative Analysis, Vol. 7 pp.1527-41
Imran, K. (2011). Determinants of Dividend Payout Policy: A Case of Pakistan Engineering Sector‟, The Romanian Economic Journal, Vol-41, pp. 47-59.
Jensen, M. C., & Meckling, W. H. (2006). "Theory of the firm: managerial behaviour, agency costs and ownership structure", Journal of Financial Economics, Vol. 3 pp.308-60
Jones, S., & Sharma, R. (2011). "The association between the investment opportunity set and corporate financing and dividend decisions: some Australian evidence", Managerial Finance, Vol. 27 pp.48-64
Juma'h, A. H., & Pacheco, C. J. (2008). The Financial Factors Influencing Cash Dividend Policy: A Sample of U.S. Manufacturing Companies. International Metro Business Journal , 4 (2), 23-43.
Karanja, J. (2013). The dividend practices of publicly quoted companies in Kenya. Unpublished MBA project, University of Nairobi
Kallapur, S., & Trombley, M. A. (2011). "The investment opportunity set: determinants, consequences and measurement", Managerial Finance, Vol. 27 No.3, pp.3-15
Kinfe, T. (2011). Determinants of dividend payout: an empirical study on banking industry in Ethiopia, 2006-2010, Master thesis, Addis Ababa University
Lang, P. D., Larry, H. P., Robert, H., & Litzenberger, G. (1989). Dividend Announcements: Cash Flow Signalling vs. Free Cash Flow Hypothesis, Journal of Financial Economics 24, 181-191.
Lee, S. W. (2006). Determinants of dividend policy in Korean banking industry‟, Banks and Bank Systems, Vol. 4, pp.67-71
Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46: 97-113.
Ling, F. S., Mutalip, M. L., Shahrin, A. R., & Othman, M. S. (2008). Dividend Policy: Evidence From Public Listed Companies in Malaysia. International Review of Business Research Papers , 4 (4), 208-222
Lonie, A. A., Abeyratna, G., Power, D.M. & Sinclair, C.D. (1996). “The stock market reaction to dividend announcements: a study of complex market signals”, Journal of Economic Studies, Vol. 23 No. 1, pp. 32-52
Maina, S. W. (2002). Empirical Relationship Between Dividend and Investment Decisions of Firms Quoted in the NSE, Unpublished MBA Thesis, University of Nairobi
Marfo-Yiadom, E., & Agyei, S. A. (2011). Determinants of Dividend Policy of Banks in Ghana‟, International Research Journal of Finance and Economics, Issue 61, pp 99-108
Miller, M., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. Journal of Business, 34: 411–433
Mihretu, M, W. (2010). Assessment of the reinsurance business in developing countries: Case of Ethiopia‟, Master thesis, University of South Africa
Myers, S. C. (2007). "Determinants of corporate borrowing", Journal of Financial Economics, Vol. 5 pp.145-75
Myers, S., & Majluf, N. (1984). “Corporate Financing and Investment Decisions When Firms have Information that Investors Do not have”, Journal of Financial Economics, Vol. 13, pp. 187-221
Mugenda & Mugenda, (2008). Research Methods: Quantitative and Qualitative approaches. Act Press: Nairobi, Kenya
Naser, K., Nuseibeh, D., & Al-Kuwari. (20040 Dividend Policy of Companies Listed on Emerging Stock Exchanges: Evidence from Banking Sector of the Gulf Co-operation Council (GCC) , Middle East Business and Economic Review 16, 1-12
Naceur, S., Goaied, M., & Belanes, A. (2006). On the determinants and dynamics of dividend policy‟, International Review of Finance, Vol. 6, pp. 1-23
National Bank of Ethiopia, (2008). Annual Report. Addis Ababa: National Bank of Ethiopia. Available from: www.nbe.org.et
Ngechu, M. (2004). Understanding the research process and methods. An introduction. Starbright Services, Nairobi
Olawale, F., Olumuyiwa, O., & George, H. (2010). An investigation into the impact of investment appraisal techniques on the profitability of small manufacturing firms in the Nelson Mandela Bay metropolitan area, South Africa, Afr. J. Bus. Manage. 4(7):1274-1280
Parua, A., & Gupta, A. (2009). Dividend history and determinants in selected Indian companies‟, Australasian Accounting Business and Finance Journal, Vol. 3(4), pp.45-86
Pandey, I. M. (2008). Financial Management, UBS Publishers’ Modern Printers, Delhi, India – 110032
Pettit, R. R. (1977). Taxes, Transaction Costs and Clientele Effects of Dividends,Journal of Financial Economics (December), pp. 419-436
Pruitt, S.W., & Gitman, L.J. (2011). "The interactions between the investment, financing, and dividend decisions of major US firms", The Financial Review, Vol. 26 No.3, pp.409-30
Riahi-Belkaoui, A., & Picur, R. D. (2011). "Investment opportunity set dependence of dividend yield and price earnings ratio", Managerial Finance, Vol. 27 No.3, pp.65-71
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2002). Corporate Finance (6th ed.),
Skinner, D. J. (2013). "Asset structure, financing policy and accounting choice-preliminary evidence", Journal of Accounting and Economics, Vol. 16 No.4, pp.407-46
Smith, A., & Chamberlain, D. (2009). Opportunities and challenges for micro insurance in Ethiopia: An analysis of the supply side and regulatory environments, Oxfam America
Smith, C. W., & Watts, R. L. (2012). "The investment opportunity set and corporate financing, dividend compensation policies", Journal of Financial Economics, Vol. 32 No.3, pp.263-92
Howard, C., (2011). "Perspectives on capital budgeting in the South African motor manufacturing industry", Meditari Accountancy Research, Vol. 19 Iss: 1/2, pp.75 – 93
Uddin, M. H., & Chowdhury, G. M. (2005). Effects of Dividend Announcement on Shareholders’ Value: Evidence from Dhaka Stock Exchange. Journal of Business Research , 7, 61-72
Vasiliou, D., & Eriotis E., (2003).“The Link Between Dividend Policy and Corporate Leverage: An Empirical Analysis of the Greek Market,”UnpublishedManuscripts
Wang, K. J., Erickson, & Gun, G. W. (1993). “Dividend Policies and Dividend Announcement Effects for Real Estate Investment Trusts,” Journal of the American Real Estate and Urban Economics Association, 21(2), pp.185-201
Woolridge, J. R., & Ghosh, C., (2005). Dividend cuts: do they always signal bad news?, Midland Corporate Finance Journal 3, pp. 20 - 32.
www.Economic outlook 2015
www.nairobi stock exchange annual audited report 2014/2015.
Zhou, P. and Ruland, W. (2006). Dividend payout and future earnings growth. Financial Analysts Journal, 62(3), 58 – 69
DOI: http://dx.doi.org/10.61426/sjbcm.v2i2.166
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.