FREE CASH FLOW, AGENCY PROBLEMS AND DIVIDENDS IN EMERGING MARKETS: THE CASE OF NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

This study sought to identify the key determining variables NSE 20-Share Index companies use as basis in their dividend payout policies. Specifically, the study looked at: the effect of financial leverage on payout policy; the effect of institutional ownership on payout policy, and the effect of free cash flow on payout policy. This research was a 10-year panel study of NSE 20 –Share Index firms, using a sample of 15 firms. The population of interest comprised all the 20 NSE-20 share Index companies listed at the NSE as at December 2016. Secondary data was collected mainly from NSE Handbook 2015-2016, 2012-2013 NSE Handbook, and annual reports of the firms over ten years from 2007 to 2016. The analysis involved both descriptive statistics and inferential statistics. The econometric models used were fixed effect model, random effect model and Panel-Correlated Standard Error (PCSE) model. In conducting the final analysis, the researcher adopted and relied on the Ordinary Least Square (OLS) coefficient estimates with Panel Corrected Standard Errors (PCSE). The study found that institutional ownership has a significant positive correlation with dividend payout policy while financial leverage has a significant negative correlation with dividend payout ratio.  The results, however, suggested that free cash flow has a negative correlation, but, is insignificant a factor in explaining why firms pay dividends. The study recommend that NSE listed firms should come up with ways to enhance their cash flow in order that they improve their payout ratios which this study view as modest. The NSE firms, in enhancing shareholders wealth,  should identify positive Net Present Value (NPV)  projects and diversify their operations to keep their cash flow stream robust and sustain their pattern of distribution. The study also recommends that NSE listed firms should reduce their gearing levels in order that they are able to make better payouts to the equity holders. These findings have implication for market regulators, investors, practitioners and enrichment of corporate finance literature.