ABSTRACT
This study sought to examine the impact of corporate governance on dividend payout of manufacturing firms listed at the NSE. The objectives of the study were; to determine the impact of board size, board composition, CEO tenure and managerial equity holding on dividend payout of manufacturing firms listed at NSE and finally, to establish the impact of corporate governance on dividend payout of manufacturing firms listed at NSE. This study employed a correlational research design. The population of the study comprised all manufacturing firms which were consistently listed at the Nairobi Securities Exchange from 2008-2014. Data for this study was obtained from the annual published financial statements. Correlation and regression analysis were used to test the impact of the independent variables relating to corporate governance practices on the dependent variable (Dividend Payout). Independent one-way ANOVA test and independent t-test (one tailed) were used to determine the level of significance.
The study results indicated that board size, board composition, CEO tenure and management equity holding had a weak negative relationship with dividend payout. Furthermore, board size had a statistical significant impact on dividend payout, while board composition, CEO tenure and managerial equity holding were found to have no statistical significant impact on the dividend payout of manufacturing firms listed at the NSE for the period 2008 to 2014. The empirical results from the multiple regression analysis indicated a correlation coefficient(R) value of 0.692. This means that there is a strong and a positive relationship between corporate governance and dividend payout(r>0.5). However, corporate governance only explained 47.8% of the differences in dividend payout as shown by the coefficient of determination value (R2) of 0.478. Moreover, the significance value on the relationship between corporate governance and dividend payout ratio was 0.263. This implied that corporate governance cannot be used to adequately predict changes in dividend payout (P> 0.05).
CHAPTER ONE
INTRODUCTION
Background of the Study
Corporate Governance is defined as the process and structure used to direct and manage business affairs of the Company towards enhancing prosperity and corporate accounting with the ultimate objective of realizing shareholder long-term value while taking into account the interest of other stakeholders. Corporate Governance is acknowledged to play an important role in the management of organizations in both developed and developing countries (Achchuthan and Kajananthan, 2013). It aims at protecting the interests of shareholders and improving performance of organizations. According to Ahmadpour et al (2012), firms having weaker governance structures face more agency problems and this increases the risk to shareholders. This is due to lack of proper structures, mechanisms and processes that ensure that a firm is managed and directed in a way that ensures increase in shareholder value. As a result, corporate governance becomes an important aspect of enhancing the performance of organization by increasing management accountability.
Hifzalnam and Mukhtar (2014), note that, corporate governance combines a set of market instruments that motivate managers to maximize the value of a firm on behalf of its shareholders. This is by providing processes and structures that are used to direct and manage the affairs of a business thereby enhancing performance and corporate accounting as well as increasing long- term shareholders value. Valenti at el (2011) affirms that corporate governance is essential in improving the performance of organizations. This is because it ensures that the interests of the shareholders are safeguarded, by making sure that the assets of an organization are utilized in a way that maximizes profitability. Therefore, corporate governance augments the performance of a company by motivating managers to take actions that maximize the wealth of shareholders
Corporate governance can decrease information asymmetries between shareholders and managers by improving a firm’s operational and financial transparency (Thomsen, 2004). The ability of managers to distort information and to increase their incentives can be mitigated by corporate governance provisions. This may in turn improve the financial transparency of an organization and reduce the agency problems as well as increase shareholders’ value (Chung at el, 2010). Al-Najjar (2010) emphasizes that increased performance and information disclosures lead to better valuation of firms and this can lead to a long-term increase in shareholders wealth. According to Murekefu and Ouma (2010), shareholders wealth can also be enhanced by a firms dividend policy. This is because the amount that a company is required to distribute to its shareholders is determined by its dividend policy. Ross at el (2002) notes that dividend policy decision is one of the most important decision areas in finance. Dividend decisions are important because they determine the amount of funds that flow to investors and the amount of funds that are retained in a firm for investment purposes. Gul at el (2012), stress that dividend policy decision is important in organizations because it enables them to achieve efficient performance and to attain their goals.
The ultimate goal of a firm is to maximize the wealth of shareholders (Griffin, 2010). Accordingly, managers are compelled to provide shareholders with good returns on their investment. Vojtech (2013) notes that efficient corporate governance can provide checks and balances between managers and shareholders and this can make firms to adopt dividend policies that maximize shareholders wealth. Sheikh and Wang (2010), state that corporate governance is aimed at protecting the interests of shareholders by reducing the agency problems and therefore, dividend policy becomes an important aspect of corporate governance.
Corporate Governance in Kenya
Corporate Governance has gained prominence in Kenya and this may have been caused partly by corporate failure or poor performance of public and private companies. As such, the Capital Markets Authority has set up guidelines for good corporate governance practices by public listed companies in Kenya in response to the importance of governance issues both in emerging and developing economies and for promoting domestic and regional capital markets growth (Kenya Gazette, 2002). The CMA also works in support with the Centre for Corporate Governance (CCG, formerly Private sector Corporate Governance Trust, PSCGT), whose establishment, was to carry out activities and programmes that aim at improving the quality of life of the people by fostering the adoption and implementation of the highest standards of corporate governance. This in turn leads to improved strategic leadership of companies and enhance profitability, effectiveness and competitiveness in the global market.
Different other bodies have are also engaged in the promotion of the principles of good corporate governance practices. The Central Bank of Kenya(CBK) demands good corporate governance for financial stability and sustainability from all licensed banks and financial institutions, the NSE for all listed companies, the Kenya Shareholders association(KSA) that mobilizes shareholders to demand good corporate governance from their organizations, and other professional bodies such as the Law Society of Kenya(LSK) (Pierce and Waring, 2004). These Corporate Governance principles mainly deal with the issues such as corporate compliance, corporate communication, accountability, board composition, role of audit committee, separation of the role of CEO and the Chair and the rights of the shareholders (Maniagi, 2003).
However, The United Nations Publication, (2004) identified several reasons why the application of these principles has not exactly been a success. Firstly, poor political governance and subsequent concentration of political and economic power in the hands of small, privileged and entrenched elite continues to bedevil these efforts. Conflict also renders it impossible for economic actors to plan and undertake the necessary activities for wealth creation. Poverty, decayed physical infrastructure (both transport and communication), weak legal and regulatory systems and underdeveloped capital and financial markets were also identified.
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Item Type: Kenyan Topic | Size: 54 pages | Chapters: 1-5
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