FIRM’S PROFITABILITY AND DIVIDEND SMOOTHING IN FINANCIAL INSTITUTIONS LISTED ON THE NAIROBI STOCK EXCHANGE

Abstract

Dividend smoothing is when you keep your dividends relative to your Earnings per share. Not too high dividends and not too low. It may also imply setting a dividend price that does not necessarily conform to retained earnings. The dividend smoothing decision can affect the value of the firm by changing the firms expected earnings in the preceding years, its cost of capital or both. One of the most important objectives of determining factors  leading  to  dividend  smoothing  of  the  firm  is  to  ensure  that  we maximize shareholders wealth while we protect the value of the firm in terms of retained earnings. The purposive of this study sought to establish the influence of profitability on dividend smoothing among the financial institutions listed at Nairobi Securities Exchange. The specific objective of this study was; to determine the influence of firm’s profitability on dividend smoothing in financial institutions listed on the national stock exchange. This study used the theories of Information Asymmetry or Signaling Theory and Agency Conflict Theory. The study employed cross-sectional research design to gather the data. The study included all the 9 listed financial institutions that were paying dividends for the last 5 years and were currently listed in the Nairobi securities Exchange. The study used primary and secondary data from NSE data base. The study tested construct, criterion and content validity. Reliability was determined by Cronbach alpha at 0.7 and above. This study analyzed data using both descriptive statistics computations as well as inferential statistics i.e. regression analysis. Analyzed data was presented using APA tables. Profitability had a unique significant contribution to the model implying that when other variables in the model are controlled, a unit change in leverage would result to significant change in dividend smoothing in the same direction. Therefore, the hypothesis was rejected. Based on the study findings, the researcher made the following recommendations that Firms ought to put in place measures to enhance and sustain their profitability since it’s an essential determinate of dividends issuance in a firm. 

Key Words: Profitability, Dividend Smoothing 

CITATION: Simecheri, A. J., & Malenya, A. (2020). Firm’s profitability and dividend smoothing in financial institutions listed on the Nairobi Stock Exchange. The Strategic Journal of Business & Change Management, 7(3), 1157 – 1168.